UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF PENNSYLVANIA 

_________________________________________________ 

 │

LEXINGTON INSURANCE COMPANY, │Civil Action No. 02-CV-4435 

 │ (Hon. Anita B. Brody)

 Plaintiff, │

 │

 - against – │

 │

DAVID FORREST, T. BEAUCLERC ROGERS IV, │

STANLEY MUNSON, MARTIN FINK, all individually, │

and NEW BEGINNINGS ENTERPRISES LLC, a │

California Limited Liability Company, and │

TARLO LYONS, a partnership, │

 │

 Defendants. │

________________________________________________│

ORDER 

AND NOW, this _______ day of _____________________, 2005, in consideration of the 

MOTION OF DEFENDANT STANLEY MUNSON FOR JUDGMENT ON THE PLEADINGS 

PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(C), the accompanying 

Memorandum of Law in support thereof, the accompanying Affidavit of Conrad Kattner, and 

any response thereto, it is hereby 

ORDERED that the Motion for Judgment on the Pleadings is GRANTED. It is further 

ORDERED that judgment shall be entered, with prejudice, in favor of Defendant, Stanley 

Munson, and against Plaintiff on all counts of Plaintiff’s Second Amended and Supplemental 

Complaint. 

BY THE COURT: 

J.

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 1 of 115
UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF PENNSYLVANIA 

_________________________________________________ 

 │

LEXINGTON INSURANCE COMPANY, │Civil Action No. 02-CV-4435 

 │ (Hon. Anita B. Brody)

 Plaintiff, │

 │

 - against – │

 │

DAVID FORREST, T. BEAUCLERC ROGERS IV, │

STANLEY MUNSON, MARTIN FINK, all individually, │

and NEW BEGINNINGS ENTERPRISES LLC, a │

California Limited Liability Company, and │

TARLO LYONS, a partnership, │

 │

 Defendants. │

________________________________________________│

MOTION OF DEFENDANT STANLEY MUNSON 

FOR JUDGMENT ON THE PLEADINGS 

PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(C)

Defendant, Stanley Munson, through undersigned counsel, hereby moves this Court, 

pursuant to Federal Rule of Civil Procedure 12(c), for judgment on the pleadings, for the reasons 

set forth in the accompanying Memorandum of Law and Affidavit of Conrad O. Kattner filed 

herewith. 

Respectfully submitted, 

BY: /s/ Conrad O. Kattner

CONRAD O. KATTNER, ESQ. 

Identification No: 035468 

MCSHEA & TECCE, P.C. 

1735 Market Street, 16th Floor 

Philadelphia, PA 19103 

 (215) 599-0800 

Counsel for Defendant, 

 Stanley Munson 

Date: ___January 27, 2005__________ 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 2 of 115
UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF PENNSYLVANIA 

_________________________________________________ 

 │

LEXINGTON INSURANCE COMPANY, │Civil Action No. 02-CV-4435 

 │ (Hon. Anita B. Brody)

 Plaintiff, │

 │

 - against – │

 │

DAVID FORREST, T. BEAUCLERC ROGERS IV, │

STANLEY MUNSON, MARTIN FINK, all individually, │

and NEW BEGINNINGS ENTERPRISES LLC, a │

California Limited Liability Company, and │

TARLO LYONS, a partnership, │

 │

 Defendants. │

________________________________________________│

MEMORANDUM OF LAW IN SUPPORT 

OF MOTION OF DEFENDANT STANLEY MUNSON 

FOR JUDGMENT ON THE PLEADINGS 

PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(C)

Defendant Stanley Munson respectfully submits this memorandum in support of 

its motion pursuant to Rule 12(c) of the Federal Rules of Civil Procedure for judgment on the 

pleadings against plaintiff Lexington Insurance Company. (“Lexington”). 

 A. INTRODUCTION

Lexington’s second amended and supplemental complaint (the “complaint”), the 

operative pleading in this action, is selectively drafted, and based only in a few respects on real 

facts: 

1. There was a series of related companies called Flashpoint 

during the relevant period which were involved in obtaining and 

supplying financing for the production of motion pictures. 

2. There were six “Hollywood Funding” transactions, as 

alleged in ¶ 4 of the complaint. 

 

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3. Tarlo Lyons, an established firm of solicitors in London, 

and specifically Stanley Munson, a salaried partner there, were 

counsel for Flashpoint in the Hollywood Funding transactions. 

The core accusation against Mr. Munson – that he was lax in acquiescing in the application of 

moneys in a Flashpoint Holding Account – was specifically made in Lexington’s original 

complaint in this case, filed July 3, 2002, but, to their prejudice, Lexington named neither Mr. 

Munson nor Tarlo Lyons as parties until the present complaint filed in April, 2004. 

Paragraph 4 identifies the six Hollywood funding transactions. It says: “Plaintiff 

[Lexington] was the insurer for the last three transactions (Hollywood Funding 4, 5 and 6); 

another insurer (HIH Casualty & General Insurance Ltd.) was insurer for the first three.” The 

complaint necessarily seeks relief only on the Hollywood Funding 4, 5 and 6 transactions, 

although it freely pleads wrongdoing with respect to earlier Hollywood Funding transactions. 

(E.g., Complaint ¶¶ 27(b), 33(a) and (b)). 

There is much more to the foundation of the story than Lexington lets on. 

Lexington is a wholly-owned subsidiary of American International Group (“AIG”), a very large, 

publicly-traded, highly profitable, prominent and recently notorious American insurance 

company. In the period when Flashpoint was active (1997-1999), the same kind of shortfall 

insurance for motion picture financing that Lexington sold could also be obtained in London 

from New Hampshire Insurance Co. (“New Hampshire”), another AIG subsidiary just like 

Lexington. New Hampshire was a participant in Hollywood Funding 1, 2 and 3 – though as a 

reinsurer, not a direct insurer. Despite that participation and the allegations of fraud in these 

earlier transactions, neither New Hampshire nor AIG seeks any recovery for them; they are not 

suing Tarlo Lyons or the other defendants here or elsewhere. 

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HIH, the insurer referred to in the portion of ¶ 4 of the complaint quoted above, 

did pay the $31 million in insurance claims presented in the Hollywood Funding 1 and 2 

transactions. However, when HIH claimed on its reinsurance from New Hampshire and two 

other reinsurers, these companies declined, claiming that HIH should have refused to pay those 

claims based on numerous grounds, including fraud: one such ground was a rigid application of 

the doctrine of warranty – long since overruled by statute in many jurisdictions (e.g., N.Y. 

Insurance Law § 3106(b)), but on which the High Court and the Court of Appeal in England 

sustained New Hampshire, enabling it to retain the substantial reinsurance premiums it had 

collected for coverage it was allowed to walk away from.

1/

 HIH went into insolvency. 

AIG and New Hampshire make no claim to recover for Hollywood Funding 1, 2 

and 3 because they benefited handsomely from what Lexington now claims here was a RICO 

violation of which it was a victim. Indeed, assuming the 10% premium identified in the UK 

Flashpoint opinions, the net premiums collected just by Lexington on the $186 million value 

(Complaint ¶ 4) of Hollywood Funding 4, 5 and 6 alone (which its complaint never refers to) 

approximate the amount of its purported damages. 

PRELIMINARY STATEMENT

The complaint alleges six counts against Stanley Munson: 

Count 1. Substantive RICO (18 U.S.C. § 1962(c)) 

Count 3. RICO conspiracy (18 U.S.C. § 1962(d)) 

Count 4. Common Law Fraud 

 

1/ HIH Casualty & General Insurance Ltd. v. New Hampshire Insurance Co., [2001] 1 Lloyd’s Rep 

378, aff’d. [2001] EWCA Civ. 735. Copies of these decisions will be supplied. According to 

paragraph 5 of the first Court of Appeal decision, HIH’s premiums were rated at 10% of the limit 

of the coverage. As a quota share reinsurer, New Hampshire should have received that amount 

less a small overrider paid to HIH. 

 3

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 5 of 115
Count 5. Tortious Interference with Contract 

Count 6. Fraudulent Inducement 

Count 7. Tortious Interference with Contract 

The damages claimed are expenses incurred by Lexington in defending and settling claims

brought under the insurance policies Lexington issued on the Hollywood Funding 4, 5 and 6 

transactions.

The factual gravemen of the complaint is in two core allegations. 

First, it is claimed that defendants Forrest and Rogers misrepresented and 

fabricated the probable earnings of the films in all the Hollywood Funding transactions and two 

miscellaneous freestanding Flashpoint films, “The New Professionals” and “It Had to Be You”. 

There is no allegation that Tarlo Lyons or Munson had any role in, or knowledge of, this alleged 

wrongdoing, although the RICO “enterprise” and conspiracy allegations of the complaint seek to 

make them financially responsible for it nevertheless. 

Second, Lexington claims against Mr. Munson and the other defendants that in 

violation of Collateral Agreements – entered into between Lexington and Flashpoint as part of 

the documentation for each slate in the Hollywood Funding transactions – the proceeds of the 

financings were applied from the Holding Account to films and other Flashpoint motion picture 

activities outside the confines of the specific slate to which each such Collateral Agreement 

applied. Here again New Hampshire’s unidentified role as reinsurer in the Hollywood Funding 

1-3 transactions creates a paradox in its affiliate’s claim as victim: the bulk of the moneys the 

complaint identifies as having been subjected to such misuse were Hollywood Funding 1-3 funds 

(where New Hampshire, although exposed, was able to profit by avoidance of its reinsurance 

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 6 of 115
responsibilities) applied to Hollywood Funding 4-6 films, which mitigated Lexington’s insurance 

exposure. (Complaint ¶ 33(a)(i) and (b)(i)). 

The predicate felonies in the RICO counts are mail fraud and wire fraud 

(18 U.S.C. §§ 1341, 1343). These statutes are plainly relevant to the specific claim of 

misrepresentation of future film earnings Lexington levels at Rogers and Forest. However, the 

applicability of these statutes is not clear at all to the part of the complaint in which Munson and 

Tarlo Lyons figure, in which the wrongdoing alleged is that Munson and Tarlo Lyons had 

“wrongfully authoriz[ed] and certif[ied] withdrawals of funds raised in the various Hollywood 

Funding transactions for purposes other than the projects to which they were dedicated...aware 

that such conduct was in breach of Flashpoint’s contractual obligations...and each deliberately 

misled plaintiff as to such conduct.” (Complaint ¶ 35). The complaint repeatedly characterizes 

defendants’ alleged wrongdoing as “misappropriation” of the borrowed funds, obviously 

intending to imply an undesirable thing, but this alleged wrong is a species of misconduct 

unknown as such both to Title 18 of the United States Code and to the law of torts. 

What Lexington’s claim comes down to is that financing from the Hollywood 

Funding 4, 5 and 6 transactions was used outside the specific film slates to which the financing 

and Collateral Agreements applied, at most the breach of contract Lexington identifies 

(Complaint ¶ 35) if (1) Mr. Munson was a party to the Collateral Agreements, which he was not; 

or (2) Mr. Munson had assumed responsibilities to Lexington some other way with regard to this 

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 7 of 115
use of the funds, which he hadn’t; and (3) the Collateral Agreements contained such restrictions 

on the use of funds, which they didn’t.2/

 

Even with a contract to which Tarlo Lyons or Mr. Munson was a party, 

Lexington’s fraud claims would founder on the basic rule that: “A tort obligation is a duty 

imposed by law to avoid causing injury to others. It is ‘apart from and independent of promises 

made and therefore apart from the manifested intention of the parties’ to a contract (Prosser and 

Keeton, Torts § 92, at 655 [5th Ed.]).” New York University v. Continental Ins. Co., 87 N.Y.2d 

308, 316 (1995). 

Finally, in taking an overview of the facts, the Court needs to recognize that, of 

the three Hollywood Funding transactions – 4, 5 and 6 – on which Lexington participated, the 

complaint only pleads misuse of the proceeds of Hollywood Funding 6 effectively. (¶ 33). 

Certain of the “misappropriations” are specifically attributed to Hollywood Funding 1-3 (¶ 33(a) 

and (b)), in which Lexington was not involved, and two “misappropriations” are specifically 

attributed to Hollywood Funding 6 (¶ 33(f) and (g)), in which Lexington participated. However, 

the other “misappropriations” (¶ 33(c), (d) and (e)) are each simply attributed to “the various 

Hollywood Funding financings” – as easily Hollywood Funding 1-3 as a later transaction – and 

thus the pleading is inadequate in these instances to state a claim on which Lexington can 

recover. 

Last, all of the claims alleged are time barred. None of the transactions took place 

later than 1998, and the alleged “misappropriations” are not claimed to have taken place later 

 

2/ Representative Collateral Agreements are annexed to the moving affidavit of John D. Gordan, III, 

submitted herewith, and are appropriately considered by the Court on the motion because of 

Lexington’s extensive citation to, and quotation from, the Collateral Agreements in the 

complaint. Lum v. Bank of America, 361 F.3d 217, 222 n.3 (3d Cir. 2004). There are variations 

in later versions. 

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 8 of 115
than 1999. Lexington admits as much, because the complaint makes an ineffectual effort to 

claim fraudulent concealment and equitable tolling. (¶¶ 93-97). 

B. THE COLLATERAL AGREEMENTS

Lexington’s case against Mr. Munson depends entirely on its assertion that 

moneys in the Hollywood Funding 1-6 transactions were “misappropriated” by Flashpoint with 

Mr. Munson’s acquiescence as a signatory on accounts established under Collateral Agreements. 

Although it is an essential element of Lexington’s allegations of mens rea that the defendants 

were “simultaneously violating” the restrictions of the Hollywood Funding 1-3 “transactions” 

when negotiating the Collateral Agreements for Hollywood Funding 4, 5 and 6, that claim is part 

of the fiction of Lexington’s complaint. Lord Justice Rix in the HIH appeal, cited in footnote 1 

above, described the status of the Collateral Agreement for Hollywood Funding 1 as follows: 

24. The collateral agreement (for the 7.23 slate) was not in fact 

executed as between HIH and Flashpoint until at least a year later. 

The document is headed “DATED with effect from the 3rd August 

1998”. That heading is by way of manuscript amendment of an 

original line which had read “DATED DECEMBER 1998”. It is 

well possible therefore that the document was in fact executed 

even later than Aug 3, 1998. Despite the working inference that I 

am in general prepared to make regarding the availability of a 

contemporary draft of the collateral agreement as of July, 1997, the 

Court was not shown such a draft in the available bundles, and my

personal attempt to find one has brought to light a draft attached to 

a Lloyd Thompson fax on July 17, 1997 (referred to there as the 

“Side Agreement”) which is a very much less sophisticated 

document than the final executed version. That again indicates 

that it is impossible to proceed on the basis of any particular 

finding as to what was seen by any party at the time of binding any 

of the three insurance documents. 

Lord Justice Rix’s example – the 7.23 slate (Hollywood 1, according to ¶ 29(a) of the Complaint) 

– shows that contrary to Lexington’s complaint, the Collateral Account for Hollywood Funding 1 

was not negotiated until sometime after Hollywood Funding 5 (Complaint ¶ 4). 

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 9 of 115
Annexed to the moving affidavit of Conrad Kattner, are the two Collateral 

Agreements applicable to Filmworks, one of the slates within Hollywood 5, chosen as a 

paradigm from Lexington’s production. 

The funds pass from the investor pool to the Jersey Flashpoint company – 

Flashpoint Ltd. (“Flashpoint Jersey”). The Flashpoint Jersey – Lexington Collateral Agreement 

(at 3(1)) provides that the “Films budget portion of the Funds” – a term not among the defined 

terms of the document – “shall be immediately deposited in the Flashpoint Jersey Holding 

Account and in turn be paid by Flashpoint under the Flashpoint UK Purchase Agreement to 

Flashpoint UK.” 

Paragraph 4(1) of the Flashpoint UK-Lexington Collateral Account provides that 

the Films budget portion of the Funds, once received from Flashpoint Jersey as provided above, 

will be immediately placed on deposit in a bank account (the “Holding Account”) opened and 

maintained by Flashpoint UK and on which a partner of Tarlo Lyons shall be a co-signatory for 

all cheques or other payment authorisations from such account. The only further provision 

respecting the “Holding Account” is paragraph 4(2): 

(2) Flashpoint further undertakes to Lexington to procure that 

Tarlo Lyons will not release any funds from such Holding Account 

in relation to the principal photography of the Films unless and 

until the Principal Production Documents in relation to the Films 

have been substantially completed to the reasonable satisfaction of

Lexington. 

The “Films” are defined in the definition section as “includ[ing] ‘Filmworks’ series of films as a 

whole, and any and all films, or excerpts and episodes therein”. 

Paragraph 4 of the Lexington-Flashpoint UK Collateral Agreement then provides 

for the establishment of a Production Account, in which moneys are to be deposited when drawn 

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out of the Holding Account in conformity with Paragraph 4(2), quoted above.3/

 Paragraphs 4(5) 

and 4(6) provide for the establishment of, and priorities of distribution from, a Collection 

Account for deposit of the Net Receivables, which are defined as the films’ Revenues less 

Producer expenses.4/

Paragraph 4(7) imposes the following obligations: 

 

3/ Production Account

(3) Upon drawdown of any monies from the Holding Account in accordance with sub-clause 

(2) above, such monies shall be paid into a production account opened for the benefit of 

Flashpoint by the Producer (the “Production Account”). 

(4) Flashpoint undertakes that withdrawals from the Production Account shall be made 

strictly in accordance with the Production and Finance Agreement, and the relevant 

budget and cashflow scheduled provided to Lexington. 

4/ Collection Account

(5) Flashpoint undertakes to Lexington to: 

(a) open and maintain the Flashpoint UK Collection Account being a specially

designated trust account with Leopold Joseph of 29 Gresham Street, London 

EC2V 7EA in the name of Flashpoint UK for the purpose of receiving all Net 

Receivables and in turn transferring such Net Receivables into the Collection 

Account up to an aggregate amount of the Collection amount; 

(b) procure that Tarlo Lyons will procure that there is opened and maintained a 

specially designated trust account with the Guernsey branch of Credit Suisse 

First Boston for the purposes of receiving from the Flashpoint UK Collection 

Account all Net Receivables (the “Collection Account”) in the name of 

 Flashpoint Jersey. 

(6) The amount standing to the credit of the Collection Account shall be held on the 

following trusts: 

(a) FIRST up to an amount in aggregate equal to the Collection Amount to 

Flashpoint Jersey to enable Flashpoint Jersey to pay such Collection Amount into

the Escrow Account for the benefit of Hollywood Funding (No. 5) Limited in 

accordance with the terms of the Purchase Agreement;

(b) SECOND to Lexington to enable Lexington to recover monies due to Lexington 

under the terms of this agreement or the Flashpoint Jersey Collateral Agreement 

generally (including without limitation, amounts due to Lexington under Clauses 

 11 and 12); 

(c) THIRD, upon execution of all liabilities and obligations under the Policy and this

agreement to Flashpoint absolutely. 

 9

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(7) Flashpoint undertakes to Lexington to procure that Tarlo 

Lyons will confirm in writing to the reasonable satisfaction of 

Lexington that Tarlo Lyons acknowledges its obligations under 

Clause 4(5) and (6) [the Collection Account] and confirms its 

intentions to comply with same. 

Finally, Paragraph 4(9) provides Lexington with the following monitoring mechanism:

Management of Accounts

(9) Flashpoint agrees to provide to Lexington (on a monthly 

basis) copies of all bank statements in relation to the Holding 

Account, Flashpoint Jersey Holding Account, Production Account, 

Collection Account, Flashpoint UK Collection Account and 

Escrow Account, together with a breakdown and reconciliation of 

monies paid and received, the payee/payer (as the case may be), 

and brief details of the reason for the payment or receipt, and 

agrees to provide such other information in relation to the accounts 

as Lexington may reasonably require. 

ARGUMENT 

STANLY MUNSON IS ENTITLED 

TO JUDGMENT ON THE PLEADINGS 

I. FAILURE TO STATE A CLAIM UPON 

WHICH RELIEF CAN BE GRANTED 

The foregoing background information greatly facilitates the Court’s task in 

identifying the utter failure of Lexington’s complaint to state a claim upon which it can be 

granted the relief it seeks.

Counts 6 and 7

Counts Six and Seven allege fraudulent inducement and tortious interference with 

contract. These claims are based on something Lexington bootstraps into calling “the Tarlo 

Lyons Representation,” but which is nothing more than Paragraph 4(2) of the Collateral 

Agreement quoted at p. 8 above. (See Complaint ¶¶ 73, 82). 

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Count Six treats this contractual language as a representation – which it is not. 

Even though there is a Representation and Warranty Section of the Lexington-Flashpoint UK 

Collateral Agreement, that section contains nothing about Tarlo Lyons or Stanley Munson. 

Lexington also insinuates that Paragraph 4(2) is a representation by Tarlo Lyons, 

christening it as such. Obviously, if this contractual language were a representation at all, it 

would be one by the contracting party, Flashpoint. 

The Flashpoint UK Collateral Agreement does contain Paragraph 4(7), dealing 

with the Collection Account, whereby Flashpoint was contractually required to obtain Tarlo 

Lyons’ written undertaking to perform the contractually specified activities, but (1) there is no 

claim that Tarlo Lyons gave the undertaking; (2) violation of such an undertaking is a breach of 

contract, if it is anything, not a fraud; (3) the only undertaking by Tarlo Lyons concerned the 

Collection Account, and Lexington does not complain about the administration of Collection 

Account; and (4) the Holding Account is what Lexington is complaining about. (Complaint ¶¶ 

42, 47(e), 73, 82). 

Paragraph 75 of the Complaint seeks to load Munson with guilt “because, inter

alia, in July 1997 Munson, acting on behalf of Flashpoint, negotiated the Collateral Agreement 

with respect to the Hollywood Funding No. 1 Transaction”, when it is obvious from the quoted 

portion of Lord Justice Rix’s opinion that the parties viewed the Collateral Agreement as so 

insignificant that more than a year later it was still in draft and unsigned. 

Nor does the language of the “Tarlo Lyons Representation” that Lexington relies 

on support Lexington’s claim. Its only limitation on the use of the funds in the Holding Account 

is that they not be used for principal photography with regard to the films governed by the 

Collateral Agreement until the applicable contractual documents have been approved. There is 

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no limitation on the use of the moneys in the Holding Account for pre-production costs for the 

films which are the subject of the Collateral Agreement or for any other purpose separate from

such films. 

Lexington is trying to make a federal crime out of what would not have risen to a 

breach of contract had Mr. Munson or Tarlo Lyons been a party to the Collateral Agreements, 

which they were not. 

Accordingly, no fraud or tort has been plead, and these counts must be dismissed. 

Count 5

This is another tortious interference claim, based on “misappropriation” of 

Flashpoint moneys to expenditures on “The Building/New Standard Post, Ice Storm and Russian 

Cinemas.” (Complaint ¶ 68). 

Although the contracts interfered with are claimed to be the Collateral 

Agreements for Hollywood Fundings 4-6, (¶¶ 68-69), the detailed allegations with regard to the 

sources of the funds applied for those three purposes do not attribute the source to Hollywood 

Funding 4-6 but instead to “the Flashpoint account that contained the (improperly commingled) 

funds raised in the various Hollywood Funding transactions” (Complaint 33(c)(iii) and 

(e)(iii) (emphasis supplied). Since these allegations fail to earmark the “misappropriated” funds 

to Hollywood Funding 4-6, in which Lexington participated, rather than Hollywood Funding 1-3, 

in which Lexington did not, Lexington has pleaded no injury. 

In any event, its claim here fails for the same reason as it did on Counts Six and 

Seven – what is pleaded does not make out a breach of the Collateral Agreement by Flashpoint. 

Consequently, no injury has been adequately plead, and once again no fraud or 

tort has been plead, and thus Count Five must also be dismissed. 

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Counts 1 and 3

These are RICO counts. The first count is a substantive count under 18 U.S.C. 

§ 1962(c). The third count is a conspiracy count under 18 U.S.C. § 1962(d). The third count 

subsumes the allegations not only of the first count but also of the second – pleaded against 

Forrest and Rogers only under 18 U.S.C. § 1962(a), alleging that a portion of the racketeering 

income they received was invested in The Building LLC and New Standard Post and that 

Lexington has been injured financially by being forced to pursue creditor’s remedies. 

(Complaint ¶¶ 55-59). 

(a) The 1962(c) claim in Count One

This claim is predicated on the mail and wire fraud statutes (18 U.S.C. §§ 1341, 

1343) and the interstate transportation of fraudulently obtained goods statute (18 U.S.C. § 2314). 

Lexington’s 1962(c) claim is thus premised exclusively on fraud. 

Under settled law in this Circuit, all fraud claims, including RICO claims, must be 

pleaded with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. Lum 

v. Bank of America, supra, 361 F.3d at 223-24. Lexington must “allege who made a 

misrepresentation to whom and the general content of the misrepresentation.” Id. at 224. See

also McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992). 

Lexington must also plead and prove reliance on the misrepresentation alleged. 

Ideal Diary Farmers v. John Labatt, Ltd., 90 F.3d 737, 746-47 (3d Cir. 1996). See also Moore v. 

Paine Webber, Inc., 189 F.3d 165, 169-73 (2d Cir. 1999); 18 U.S.C. § 1964(c). 

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From the shape of Lexington’s pleading it seems that the “Tarlo Lyons 

Representation” from Counts 6 and 7 is not a basis for the RICO claim. If it were, they would 

fail to support it for the reasons already discussed. 

Otherwise, the Court will look in vain for the identification in the RICO pleadings 

of any misrepresentations made by Stanley Munson. 

These counts are little changed from the original pleading filed by Lexington in 

July 2002, when only Mr. Forrest and Mr. Rogers were named, and this element may have been 

satisfied as to them by the laundry list of misrepresentations on film performance now transposed 

to ¶ 27 of the existing complaint. But neither Mr. Munson nor Tarlo Lyons are alleged to have 

had any part in, or knowledge of, that activity: the charge against them is that they acquiesced in 

Flashpoint’s “misappropriation” of the proceeds from one Hollywood Funding deal for the 

purposes of another, or for other Flashpoint business purposes. But nowhere is there a single 

specific allegation that Mr. Munson misrepresented anything to anybody, much less to 

Lexington. 

Similarly Lexington fails to plead reliance on any identifiable misrepresentation 

by Mr. Munson. This is hardly surprising, because as in Ideal Diary Farms, the 

“misappropriations” complained of would be immediately apparent from the monthly statements 

and reconciliation to which Lexington was contractually entitled (see paragraph 4(9) of the 

Collateral Agreement, quoted above at page 10). Lexington’s pleading is silent about these 

reports, but the facts can only be: (1) the reports misrepresented the true situation – something 

that Lexington would undoubtedly plead if it could and it has not; or (2) the reports disclosed 

what was happening, in which case Lexington has no fraud claim; or (3) Lexington never asked 

for the reports it was entitled to, or never looked at the ones it got, because its staff was entirely 

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indifferent to the “misappropriations” – nothing more sinister than taking money from the wrong 

pocket for valid business reasons – which its lawyers have puffed up after the fact to federal 

criminal violations. In any event, the closest that Lexington ever gets to pleading reliance – even 

as to the alleged film performance misrepresentations that Munson or Tarlo Lyons were not 

involved in – is the mere statement that “plaintiff justifiably relied on such misrepresentations” 

(Complaint ¶ 44) and “Had plaintiff known the truth” (Complaint ¶ 46), neither of which 

complies with Rule 9(b)’s requirement to specify who relied on what said by whom.

5/

A final RICO point is the requirement that the plaintiff plead the personal 

participation of each defendant in two racketeering acts injuring the plaintiff. See Eaby v. 

Richmond, 561 F. Supp. 131, 134 (E.D. Pa. 1983); Ronly, Ltd. v. Feingold, 1990 WL 187019, at 

*3 (E.D. Pa. 1990). See also First Capital Asset Mgmt. v. Satinwood, 385 F.3d 159 (2d Cir. 

2004). Here, in coopering Munson and Tarlo Lyons to its existing RICO claim, Lexington 

simply added subparagraph (e) to what is now paragraph 47: 

(e) on information and belief, numerous faxes between 

defendant Fink in California and defendants Munson and Tarlo 

Lyons in the United Kingdom for the purpose of arranging for 

withdrawals from the Flashpoint holding account of the monies 

raised in the various Hollywood Funding transactions. 

Such nonspecific allegations on information and belief hardly meet the pleading requirements for 

the two predicate RICO felonies, particularly since, as noted several times before, Lexington was 

not involved in and has no standing to complain about Hollywood Funding 1, 2 and 3. 

 

5/ Lest the Court be skeptical that Lexington would be indifferent to the management of moneys in

transactions in which it was ostensibly exposed for nearly $200 million, the proof at trial would 

show that, despite appearances, at the inception of each transaction, Lexington laid off all but a 

tiny percentage of the risks on other carriers by the use of reinsurance and was left with almost no 

economic interest. 

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 17 of 115
(b) the 1962(d) claim in Count Three

The present 1962(d) conspiracy claim is pleaded exactly as it was when the 

original complaint was filed against Forrest and Rogers alone in July 2002. It pleads two objects 

– the 1962(c) substantive violation alleged in the first count and the 1962(a) substantive 

violation pleaded in the second. When Tarlo Lyons, Munson, and the other defendants were 

added to the case in April 2004, they were named in the first count but not the second; there are 

no allegations against them that relate to the second count. Hence, it is supposed that the dual 

objects pleaded in the conspiracy count relate to Forrest and Rogers alone, and only the first 

object to all other defendants except New Beginnings. 

The general rule is that in a case such as this one, where the substantive 1962(c) 

violation pleaded is deficient, that deficiency requires dismissal of the 1962(d) conspiracy count 

as well. In the rare instances where the 1962(c) count is well pleaded but the plaintiff can only 

show injury from conduct in furtherance of the conspiracy apart from the pattern of racketeering 

activity alleged, then in this Circuit a conspiracy claim under Section 1962(d) may still lie if the 

injury-causing conduct is a felony identified in Section 1961(1). Rehkop v. Berwick Healthcare 

Corp., 955 F.3d 285, 289-91 (3d Cir. 1996). See also Breslin v. Brainard, 2003 U.S. Dist. 

LEXIS 19609 (E.D. Pa. 2003). However, here at least as to Mr. Munson, because of the 

deficiencies on the underlying fraud claims, and potentially as to all defendants because of the 

inadequate pleading of reliance identified above, the case is governed by the general rule and 

Count 3 must be dismissed. 

(c) Count 4

This claim is disposed of by the discussion of fraud and reliance under the 

discussion of Count 1. 

 16

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 18 of 115
II. STATUTE OF LIMITATIONS

All of Lexington’s state law claims are governed by the Pennsylvania Uniform

Statute of Limitations on Foreign Claims Act, which applies the shorter of the foreign limitations 

period or the applicable Pennsylvania statute of limitations. 42 Pa. Cons. Stat. Ann. J.A. § 5521. 

The Pennsylvania statute of limitations for common law fraud (Count 4) and 

fraudulent inducement (Count 6) is two years. 42 Pa. Cons. Stat. Ann. § 5524(7). The 

Pennsylvania statute of limitations for tortious interference with contract (Counts 5 and 7) is two 

years. 42 Pa. Cons. Stat. Ann. § 5524(3). These claims obviously accrued earlier than April 

2002, which was two years prior to the filing of the complaint against Mr. Munson and Tarlo 

Lyons. Lexington admits knowledge of the fraud by the end of 2000. 

Accordingly, all of Lexington’s state law claims, Counts Five, Six, and Seven, 

accrued before April 2002, and thus must be dismissed under the applicable two year statute of 

limitations. 

RICO claims (Counts 1 and 3) have a four-year statute of limitations. Agency 

Holding Corp. v. Malley-Duff Assocs., 483 U.S. 143, 152-156 (1987). There is no question that 

even the last of the acts pleaded against any of the defendants was in 1999, more than four years 

before Mr. Munson and Tarlo Lyons were added to the complaint. None of the possibilities for 

relation back under Rule 15(c) of the Federal Rules of Civil Proceedings apply – indeed, “Mr. 

Munson of Tarlo Lyons” was even identified by name in the original complaint (¶ 32(c)) filed 

July 2002 as someone defendants Forrest and Rogers knew “would certify any draw he was 

requested to certify, without regard to the propriety of the draw.” 

The current rule for the accrual of RICO claims in this Circuit is the “injury 

discovery rule” announced in Forbes v. Eagleson, 228 F.3d 471, 484 (3d Cir. 2000). Under 

 17

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 19 of 115
Forbes “a RICO claim accrues when ‘plaintiffs knew or should have known of their injury.’” 

Mathews v. Kidder, Peabody & Co., 260 F.3d 239, 250-51 (3d Cir. 2001). As noted earlier, 

Lexington had a contractual right under Section 4(9) of the Flashpoint UK – Lexington 

Collateral Agreements to receive monthly reports which would have revealed all of the injurious 

“misappropriations” now claimed to have harmed Lexington. In the paragraphs (¶¶ 93-96) 

devoted to “fraudulent concealment and equitable tolling” in the complaint there is no allegation,

as there surely would be, that Flashpoint submitted falsified reports. Therefore, it can only be 

the case that either (1) accurate reports were submitted or (2) the reports that Flashpoint was 

contractually bound to submit were not provided, a circumstance in itself more than sufficient to 

have led a sophisticated insurer to “recognize[] it as a storm warning” -- and Flashpoint as its 

source -- requiring immediate investigation and the diligence while Lexington admits it did not 

even initiate for two years. Id. at 252. 

As for equitable tolling, Lexington offers an explanation of its inability to 

discover the alleged misrepresentations regarding film performance (Complaint at ¶ 96), but their 

aspect of the claim does not involve Mr. Munson or Tarlo Lyons. The only justification for 

Lexington’s failure to discover the “misappropriations” of which it complains is its bald 

assertion that: “Defendants’ frauds and other misconduct were inherently self-concealing.” 

(Complaint ¶ 93). Not only is this naked assertion light years away from what it is Lexington’s 

burden to establish to claim the benefit of equitable tolling, Forbes, supra, 228 F.3d at 487, the 

Collateral Agreements, which are crucial to Lexington’s fraud claim, prove that the opposite is 

true. 

Accordingly, under the injury discovery rule, Lexington’s RICO claims accrued 

before April 2000, for from the face of the complaint and the Collateral Agreements paragraph 

 18

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 20 of 115
4(9), Lexington knew or should have known of its injury and its source by then, and thus Counts 

One and Three must be dismissed for this additional reason. 

CONCLUSION

The motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal 

Rules of Civil Procedure should be granted, and all claims against Defendant, Stanley Munson, 

should be dismissed by entry of an Order in the form attached. 

Respectfully submitted, 

BY: /s/ Conrad O. Kattner 

CONRAD O. KATTNER, ESQ. 

Identification No: 035468 

MCSHEA & TECCE, P.C. 

1735 Market Street, 16th Floor 

Philadelphia, PA 19103 

 (215) 599-0800 

Counsel for Defendant, 

 Stanley Munson 

Date: ____January 27, 2005_________ 

 19

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 21 of 115
UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF PENNSYLVANIA 

_________________________________________________ 

 │

LEXINGTON INSURANCE COMPANY, │Civil Action No. 02-CV-4435 

 │ (Hon. Anita B. Brody)

 Plaintiff, │

 │

 - against – │

 │

DAVID FORREST, T. BEAUCLERC ROGERS IV, │

STANLEY MUNSON, MARTIN FINK, all individually, │

and NEW BEGINNINGS ENTERPRISES LLC, a │

California Limited Liability Company, and │

TARLO LYONS, a partnership, │

 │

 Defendants. │

________________________________________________│

EXHIBIT LIST FOR 

MOTION OF DEFENDANT STANLEY MUNSON 

FOR JUDGMENT ON THE PLEADINGS 

PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(C)

A. Copy of Opinion in HIH Casualty and General Ins. Co. v. New Hampshire Ins. 

Co., 2001 Lloyd’s Rep. IR 224 (Queen’s Bench, Commercial Court, Dec. 4, 2000) (Steel, J.). 

B. Copy of Opinion in HIH Casualty and General Ins. Co. v. New Hampshire Ins. 

Co., 2001 Lloyd’s Rep. IR 596 (Court of Appeal, Civil Division, May 21, 2001) (Rix, LJ.). 

C. Affidavit of Conrad Kattner 

D. Collateral Agreement re: Filmworks between Lexington and Flashpoint (Jersey) 

E. Collateral Agreement re: Filmworks between Lexington and Flashpoint (UK) 

Certificate of Service. 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 22 of 115
Exhibit A 

A. Copy of Opinion in HIH Casualty and General Ins. Co. v. New Hampshire Ins. 

Co., 2001 Lloyd’s Rep. IR 224 (Queen’s Bench, Commercial Court, Dec. 4, 2000) (Steel, J.). 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 23 of 115
2000 WL 33148819 Page 2

2000 WL 33148819 (QBD (Comm Ct)), [2001] C.L.C. 481, [2001] 1 Lloyd's Rep. 378 

(Publication page references are not available for this document.)

Hih Casualty and General Insurance 

Limited v. New Hampshire Insurance 

Company, 

Independent Insurance Company Limited, 

Axa Reassurance S.A. 

No. 1999 Folio No: 1248 

2000 Folio 40 

2000 Folio 268 

 

High Court of Justice Queen's Bench 

Division Commercial Court 

 

QBD 

 

Before: The Hon. Mr. Justice David Steel 

 

Monday 4th December, 2000 

 

Representation

MR. J. Flaux Q.C. and Mr. S. 

Picken(instructed by Holman, Fenwick &

Willan) appeared on behalf of the Claimant. 

Mr. C. Hancock Q.C. and Ms. S. 

Masters(instructed by Kennedys) appeared 

on behalf of the Defendants (New

Hampshire).

Mr. S. Ruttle Q.C. (instructed by Davies 

Lavery) appeared on behalf of the 

Defendants (Independent).

Mr. P. Gross Q.C., Mr. P. Edeyand Mr. M. 

Collett (instructed by D J Freeman ) 

appeared on behalf of the Defendants (Axa).

JUDGMENT

Introduction

 1. Pursuant to an order dated the 22nd 

August 2000, the court has heard argument 

on various preliminary issues that arise in

relation to three related actions. In each of 

those three actions, the Claimant was HIH 

Casualty and General Insurance Company 

Limited ("HIH"). HIH had underwritten two 

film finance insurance policies. The insured

was Law Debenture Trust ("LDT"). The

disputes in the three actions relate to 

reinsurance of that cover.

 2. The two underlying insurance policies 

concerned two separate groups of films: one

with regard to a number of films to be coproduced by 7.23 Productions LLC and 

Flashpoint Limited (the "7.23 slate"); the 

other with regard to a number of films to be

co-produced by Rojak Films Inc. and 

Flashpoint Limited ("the Rojak slate"). Axa 

Reassurance SA ("Axa") and New 

Hampshire Insurance Company Limited

("New Hampshire") are reinsurers in respect 

of HIH's liability under both policies: 

Independent Insurance Company Limited 

are reinsurers in respect of HIH's liability 

under the 7.23 policy only.

 3. HIH, having paid LDT sums totalling

over US$31 million, seek to recover in the 

three actions contributions towards some

80% of that sum under the reinsurance 

agreements. The reinsurers have refused to

indemnify HIH on the grounds that HIH 

should not have met LDT's claims or, 

alternatively, that, whatever the position was

under the insurance contract, they are not 

obliged to pay under the reinsurance 

contract for various reasons including 

breaches of warranty and breaches of the 

duty of good faith.

Copr. © West 2004 No Claim to Orig. Govt. Works 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 24 of 115
2000 WL 33148819 Page 2

2000 WL 33148819 (QBD (Comm Ct)), [2001] C.L.C. 481, [2001] 1 Lloyd's Rep. 378 

(Publication page references are not available for this document.)

 4. For the purposes of the preliminary 

issues, the parties have agreed that it be 

assumed that all the allegations of fact made 

by the reinsurers in the various defences and 

counter claims are true. The preliminary 

issues focus on two matters; firstly, the

question whether any terms of the 

underlying insurance and/or the reinsurance 

contract have been correctly identified by

the reinsurers as warranties; and, secondly, 

the impact of a clause within the underlying

insurance wording which HIH say both 

precluded it from resisting payment of the 

underlying insurance claim and prevents the 

reinsurers from relying on anything that they 

have pleaded as grounds for not 

indemnifying HIH.

The commercial structure

 5. The commercial structure of the 

arrangements is broadly as follows. 

Flashpoint Ltd ("Flashpoint") entered into 

production and finance agreements with 

7.23 Productions Inc. and Rojak Films Inc. 

Flashpoint in turn obtained finance from two 

companies, Hollywood Funding Limited and 

Hollywood Funding No. 2 Limited, which 

were corporate vehicles for various 

investing financial institutions such as 

Credit Suisse First Boston. This finance was 

obtained pursuant to "purchase agreements" 

under which, in consideration for providing 

the necessary payments to Flashpoint, HFL 

would receive revenue from the film 

productions subject to a cap. HFL funded its 

payment obligations to Flashpoint by means

of Notes constituted by a trust deed made 

between LDT and HFL.

 6. It follows that, through the trust deed in 

each case, LDT was the ultimate investment

vehicle for the various investors. Part of the 

collateral security that those investors

required was a "pecuniary loss indemnity"

insurance. This would indemnify LDT if at 

the end of a defined period there was a 

shortfall between the amount of finance 

provided and the revenue collected. 

Flashpoint undertook to procure such 

insurance naming LDT as the insured. To 

that end, Flashpoint approached Lloyds' 

brokers Lloyd Thompson who specialised in 

placing this type of insurance. It appears that 

the brokers had a "core" market of insurers 

who were interested in underwriting such 

insurance, including HIH, AIG (New 

Hampshire), Axa and Kemper Re. The 

business was structured as a 100% insurance 

of LTD by HIH with other companies, 

including New Hampshire and Axa, 

participating by way of lines on an 80% 

quota share reinsurance of HIH.

 7. The first of the risks to be written related

to 7.23 Productions. The insurance slip was 

subscribed by the claimant's underwriter Mr 

Steve Mitchell on the 13th August 1997 for 

a 100% "subject to reinsurance of 80%". 

The slip provided (inter alia) as follows: 

TABULAR OR GRAPHIC MATERIAL 

SET FORTH AT THIS POINT IS NOT 

DISPLAYABLE 

 8. About a week later, Mr Mitchell agreed 

and signed the Pecuniary Loss Indemnity 

policy wording which had been through a 

number of drafts. The precise status of this

document and, in particular, whether it was 

by way of an endorsement of, or substitution

for, the Slip Policy was in issue. Its form 

was as follows:

Pecuniary Loss Indemnity Policy 

Copr. © West 2004 No Claim to Orig. Govt. Works 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 25 of 115
2000 WL 33148819 Page 3

2000 WL 33148819 (QBD (Comm Ct)), [2001] C.L.C. 481, [2001] 1 Lloyd's Rep. 378 

(Publication page references are not available for this document.)

 Dated 22nd August 1997 

HIH ... being the company issuing this 

policy (hereinafter ... referred to as the 

"Insurer") unconditionally ... and 

irrevocably agrees with the "Assured" ... that 

in consideration of the payment of the 

premium ... and subject to the insuring 

clause, definitions, exclusions and 

conditions of this policy that the Insurer will 

pay amounts due to the Assured on the 

respective due dates payment as set out in 

this policy.

Preamble

(A) Whereas Flashpoint Ltd ... has 

invested or is in the process of investing six 

revenue generating entertainment projects 

collectively known as 7.23 (the Projects) 

where all the revenue generated thereby ... is 

due to be paid into the collection account 

and 

 (B) Whereas pursuant to the purchase 

agreement ... dated on or about the date of 

this policy and made between Flashpoint Ltd 

and Hollywood Funding Ltd (the Purchaser) 

Ltd has agreed or will agree to pay to the 

escrow account ... the collection amount ... 

on the last day of the policy period ... and 

(C) Whereas the Purchaser has decided to 

fund its payment obligations under the 

purchase agreement by the issue of US$ 

16,400,000 Zero Coupon Notes due 1999 ... 

(D) Whereas Flashpoint Ltd has procured 

the issue of this Policy in favour of the 

Assured 

(E) Whereas neither the Purchaser nor the 

Assured is involved nor has any interest in 

the projects or in the collection amount

Now Therefore

Clause 1 Insuring Clause

1.1 Initial ClaimIf at the close of business 

on the last day of the Policy Period the 

amount of the balance standing to the credit 

of the Escrow Account is less than the Sum 

Insured (as defined in the Schedule) as a 

consequence of the occurrence of the 

Insured Peril then on the last day of the 

Waiting Period (as defined in clause 2.6 

below) the Insurer will pay to, or to the 

order of, the Assured such US Dollar 

amount as is necessary to ensure that the 

Assured receives and retains in the Escrow

Account a net sum equal to the Sum Insured 

...

Clause 2 Definitions

2.1 Insured PerilInsured Peril means the 

failure to generate a balance in the Escrow 

Account as at the last day of the Policy 

Period equal to the Sum Insured, for any 

reason whatsoever. 

This definition includes, but is not limited 

to, the failure of the Projects to generate a 

balance in the Collection account equal to,

or in excess of, the Sum Insured or the 

failure of Flashpoint Ltd to make any 

payment under the Purchase agreement for

any reason whatsoever ... 

 2.3 Escrow AccountThe Escrow Account 

means the account set up with the Guernsey 

branch of Credit Suisse First Boston 

(account no. 15091) in the name of the 

Assured.

Clause 4 Assignments and Amendments

 4.1 Assignments by the AssuredThe 

Assured may, at any time, assign all or any 

of its rights and benefits under this Policy ... 

4.3 Amendments to the PolicyThis Policy 

may not be amended, cancelled, revoked or 

Copr. © West 2004 No Claim to Orig. Govt. Works 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 26 of 115
2000 WL 33148819 Page 4

2000 WL 33148819 (QBD (Comm Ct)), [2001] C.L.C. 481, [2001] 1 Lloyd's Rep. 378 

(Publication page references are not available for this document.)

rescinded without the prior written consent 

of the Assured.

Clause 7 Governing Law and Jurisdiction

7.1 English LawThis Policy shall be 

governed by, and construed in accordance 

with, the laws of England and Wales. 

 7.2 English CourtsThe Insurer and the 

Assured hereby irrevocably agree for the

benefit of each other that the courts of 

England shall have jurisdiction to hear and 

determine any suit, action or proceedings ...

Clause 8 Disclosure and/or Waiver of 

Rights 

8.1 To the fullest extent permissible by 

applicable law, the Insurer hereby agrees

that it will not seek to or be entitled to avoid

or rescind this Policy or reject any claim 

hereunder or be entitled to seek any remedy 

or redress on the grounds of invalidity or 

unenforceability of any of its arrangements 

with Flashpoint Ltd. or any other person (or 

of any arrangements between Flashpoint 

Ltd. or the Purchaser) or non-disclosure or 

misrepresentation by any person or any 

other similar grounds. The Insurer 

irrevocably agrees not to assert and waives

any and all defences and rights of set-off 

and/or counterclaim (including without 

limitation any such rights acquired by 

assignment or otherwise) which it may have 

against the Assured or which may be

available so as to deny payment of any 

amount due hereunder in accordance with

the express terms hereof"

 9. The reference in the Slip Policy to a 

"side agreement" is a reference to a 

collateral agreement between the Claimants 

and Flashpoint. This agreement made

provision for the collection and control of 

funds. Of particular note was that, pursuant 

to Clause 5 of the collateral agreement, 

Flashpoint represented and warranted that "it 

has fully and accurately disclosed to HIH in 

respect of the Policy all information which

is material to the consideration of the risks

forming the policy, or to the terms, 

conditions and exclusions contained in the 

policy". Furthermore Clause 10 headed 

Good Faith reads as follows: 

 "Flashpoint and HIH acknowledge that 

this agreement have been (sic) entered into 

for the purposes of managing the risks 

contained in the policy and it is the parties

intention that the utmost good faith shall be 

the essence of the relationship between 

them, and in the interpretation and the effect 

of this agreement and in the negotiation and 

placement of the policy" ...

 10. The second of the risks to be written 

was in respect of Rojak Films Inc just a few 

months after the 723 Productions insurance 

had been concluded. The claimants 

subscribed to the slip 100% on the 4th 

December 1997. The slip was in broadly 

similar terms to that in respect of 723 

Productions. So far as there were any 

material differences they were as follows: 

TABULAR OR GRAPHIC MATERIAL 

SET FORTH AT THIS POINT IS NOT 

DISPLAYABLE 

The Pecuniary Loss Indemnity Policy 

wording issued in respect of this Slip was in 

materially identical terms.

 11. The reinsurance slip in respect of 7.23 

Productions provided (inter alia) as follows: 

TABULAR OR GRAPHIC MATERIAL 

SET FORTH AT THIS POINT IS NOT 

Copr. © West 2004 No Claim to Orig. Govt. Works 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 27 of 115
2000 WL 33148819 Page 5

2000 WL 33148819 (QBD (Comm Ct)), [2001] C.L.C. 481, [2001] 1 Lloyd's Rep. 378 

(Publication page references are not available for this document.)

DISPLAYABLE 

 12. The Reinsurers who subscribed that 

Reinsurance Slip were Axa, New Hampshire 

(AIG), CCR, Kravag, Deutscher Lloyd and 

Independent. It is perhaps to be noted that 

AIG's stamp was "subject to reinsurance" 

and Independent's stamp was expressed on 

the basis "to max loss any one film for 100% 

is USD 3,900,000."

 l3. The stamps of all the reinsurers were 

subject to "all amendments being agreed ".

With the exception of differences reflecting

those between the two underlying policies, 

the Reinsurance Slip in respect of Rojak was

on the same terms. The Reinsurers were

Axa, New Hampshire (AIG), CCR and GIO.

 14. At the expiry of the Policy period in 

relation to the 7.23 slate, revenue collected 

was only US$1,621,500 leaving a shortfall 

from the sum insured of some US$ 

14,778,500. Similarly at the expiry of the 

policy for a period relating to Rojak slate,

the revenue collected was only

US$829,526.43, giving another substantial 

shortfall from the sum insured. The claims

of LDT were each paid by the Claimants.

 15. There are extensive pleadings in all the 

actions but there are certain issues that are 

common, both as between the various 

Reinsurers and as between the two film

projects that had been insured. The principal 

examples of these common issues are as

follows 

 a The Reinsurers contend that the 

underlying insurance contained a warranty 

to the effect that a slate of six or ten films

respectively would be made 

b The Reinsurers contend that the 

Reinsurance contained such a warranty and 

a further warranty that the insurers would 

obtain the consent of Reinsurers to any 

amendment to the terms of the underlying 

insurance 

c The Claimants contend that Clause 8 of

the Policy wording disabled them from 

relying upon any breach of warranty by the 

original Assured. 

 d The Claimants further contend that 

Clause 8 was a term of the reinsurance and 

precluded the Reinsurers from relying upon 

any breach of warranty and further 

precluded the Reinsurers from relying upon 

any misrepresentation or nondisclosure 

unless the same was fraudulent.

 16. Against this background the following 

preliminary issues were ordered to be 

determined. 

1 Are the terms (of both the insurance 

contracts and reinsurance contracts) alleged 

by the Reinsurers to have been warranties in 

fact such? 

2 What is the effect of Clause 8 of the 

underlying insurance contract? In 

particularly does it mean that the facts and 

matters alleged in the defences (if true)

would not have provided the Claimant

Insurer/Reinsured with a defence (whether 

in whole or in part) to the underlying 

Insured's claim?

 3 On the assumption that the Reinsurers'

underwriters were aware that the underlying 

policy wording contained Clause 8, was

Clause 8 a term of the reinsurance contract? 

Is the answer different if the underwriters

were not so aware?

4 What is the effect of Clause 8 in the 

context of the reinsurance contracts? In

particular does it mean that: 

i The facts and matters alleged in the

defences and counterclaims (if true) do not 

provide the Defendant Reinsurers with a 

Copr. © West 2004 No Claim to Orig. Govt. Works 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 28 of 115
2000 WL 33148819 Page 6

2000 WL 33148819 (QBD (Comm Ct)), [2001] C.L.C. 481, [2001] 1 Lloyd's Rep. 378 

(Publication page references are not available for this document.)

(complete or partial) defence (including by 

way of set-off) to the Claimants Insurers 

/Reinsured's claim; and/or 

ii the Defendant's Reinsurers do not 

(or did not) have the right to avoid the 

reinsurance contract on grounds of 

misrepresentation or nondisclosure 

(assuming they otherwise have or had such a 

right) irrespective of whether or not the 

relevant misrepresentation or nondisclosure 

was negligent or fraudulent as opposed to 

innocent.

Issue 1: Warranty

 17. The question is drafted in broader 

terms but the central issue here is whether 

the insurance or reinsurance or both 

contained a warranty to the effect that a slate 

of 6 or 10 films respectively would be made. 

This in turn breaks down into two questions: 

 i. Was there a term to that effect in either

or both the underlying and the reinsurance 

policies?

ii If so, did it have the status of a

warranty?

 18. The threshold issue is to determine

what document or documents constitute the

underlying insurance. It was HIH's case that 

the policy was contained solely in the 

Pecuniary Loss Indemnity Policy dated the 

22 supernd August 1997. This, it was 

contended, had superseded the slip policy. 

Accordingly, it was further submitted, it was

not permissible to have regard to the slip 

even as an aid to construction of the 

insurance contract: see Youell v. Bland 

Welch [1992] 2 Lloyd's Rep. 127.

 19. In support of this proposition, HIH 

argued that the express condition that the 

Pecuniary Loss Indemnity wording was to 

be agreed by Leading Underwriter exhibited 

an intention that the slip policy should be

replaced by a formal policy. Consistent with 

that, the policy dated the 22 supernd August 

went beyond setting out the wording and 

constituted a self-contained contract of

insurance.

 20. I am not persuaded by that argument. It 

strikes me as notable that the slip is indeed

headed "slip policy". The conditions 

expressly contemplate the preparation of 

wording to be agreed, without any inference 

that the wording should be in the form of a

formal policy in substitution for the slip 

policy. Whilst the "policy" dated the 22 

supernd August is, on one view, fashioned 

in the form of a complete policy, it notably

contains no reference, for example, to the 

maximum of $3.9 million "any one film". 

Whilst it is possible that this reflects

agreement with the leading underwriter to 

exclude that limitation, this is a conclusion

that I would reach with the greatest of 

hesitation given the presence of such a limit 

in the reinsurance slip policy. (Indeed HIH 

was at pains to emphasise the need for the 

two policies to be back to back.)

 21. It has to be said that the structure of the 

insurances only makes sense in the context 

of cover being furnished for a specific 

number of films. The sum insured reflected 

the combined cost of producing the entire 

slate, the premium being a percentage

thereof. Consistent with this, the placing

documentation spoke to a "slate" of films. In 

contrast, underwriters would probably not 

have been able to rely upon the terms of the 

side agreements in the event of a shortfall on 

the number of films since there was no 

express provision contained in them about 

completing the slate.

Copr. © West 2004 No Claim to Orig. Govt. Works 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 29 of 115
2000 WL 33148819 Page 7

2000 WL 33148819 (QBD (Comm Ct)), [2001] C.L.C. 481, [2001] 1 Lloyd's Rep. 378 

(Publication page references are not available for this document.)

 22. I prefer the view that the underlying 

policy is contained in the slip policy, subject 

to the terms and conditions contained in the 

policy wording dated the 22 supernd 

August. I am fortified in this view by the 

terms of the cover notes issued by the 

brokers and, indeed, the formulation of 

paragraph 1 of the various Particulars of

Claim filed by HIH to the same effect. It 

follows that, in my judgment, it was a term 

of the policy that the full slate would be 

made.

 23. If this conclusion were wrong, there 

would remain the issue whether such a term 

is contained within the August policy in any 

event. This is more finely balanced but I

prefer the view that there is such a term. The 

preamble defines the "projects" as the full 

slate of films. Any commercially realistic

construction of the specified insured peril 

involves the premise that the projects are to 

be completed in order to generate such

income as may be forthcoming. Otherwise 

the policy becomes a cash performance bond 

which must answer even if none of the films 

are made despite the provision of funding.

 24. Once the conclusion is reached that it 

was a term of the policies that the full slate 

of films would be made, it is readily to be 

concluded that the term was a warranty. The 

absence of the word "warranty" is of no 

significance. The test is whether the clause

has a material bearing on the risk: see

Barnard v. Faber [1893] 1 QB 340. It 

manifestly does in the sense that, the fewer 

the films that are made, that very same few 

must generate the same return. It is no 

answer to treat breach of the term as 

answerable in damages as it would be 

impossible to assess the shortfall attributable

to a particular missing film.

 25. Other alleged warranties in the

underlying insurance were only advanced in 

the most tentative form and I say no more 

about them. However, once it is concluded 

that the underlying policies contained a 

warranty with regard to the completion of

the full slate, it can readily be concluded that 

the reinsurance contracts contained the same

warranty. I see this despite the reservations

expressed by Lord Griffiths with regard to

the incorporation of a warranty from the

underlying policy in a different context; 

Vesta v. Butcher [1989] AC 852. In the first 

place, the interest in the reinsurance slip is

expressed "as original policy". This in itself

imports the need for the full slate.

 26. Furthermore, as both HIH and New 

Hampshire have been at pains to emphasise, 

I accept the basic need for the two levels of

insurance to be back-to-back. This was put, 

legitimately in my view, as a matter of 

general principle in the context of facultative

insurance (see e.g. Vesta v. Butcher [1989] 

AC 852 and Groupama Navigation et 

Transports v. Catatumbo CA. Seguros 

[2000] 2 Lloyd's Rep 350). But stress was 

also properly put on the history of the

placement which demonstrated that HIH 

was fairly to be regarded as "fronting" the 

insurance for a pool: the result was not 

dissimilar to a split of the risk at the primary 

level among all the underwriters, with HIH 

as the leader.

 27. All three reinsurers also alleged that the

term in the contracts of reinsurance that 

required the reinsured to obtain the 

reinsurers' agreement to all amendments to 

the original policy was a warranty. In this

connection I derive no assistance, contrary 

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to the submissions on behalf of HIH, from 

the adjacent terms relating to the

appointment of lawyers and accountants and

payment of their fees. In particular I reject

the submission that the prescribed remedy 

for breach of the amendment clause is nonsimultaneous payment by reinsurers. In the 

event of a material amendment, such would 

be no remedy at all.

 28. The starting point, as I see it, is to 

determine the true scope and meaning of the

amendment clause. In particular, does it 

cover any amendment, or only a material 

amendment? For instance, clause 9.2 of the 

wording provides: Notwithstanding Clause 5 

no claim may be made under this Policy 

after the expiry of 180 days after the last day 

of the Discovery Period. In the event that the 

reinsured was to agree with the original 

assured to a reduction of that period to, say, 

100 days, an amendment that on any view 

would not be material to the risk, would the 

clause require agreement on the part of the 

reinsurers?

 29. The only commercially realistic

construction of the clause, in my view, 

involves excluding from its application 

immaterial amendments. By immaterial, I 

mean changes that do not affect the sense or 

substance of the underlying policy in a 

manner potentially prejudicial to the

reinsurer. If this were right, it follows, in my

judgment, that it would be right to categorise 

the amendment clause as a warranty. The 

outcome does no more than give contractual 

substance to the position at common law:

see Norwich Union Fire Insurance Soc. v. 

Colonial Mutual Fire Ins. Co. [1922] 2 KB 

461.

Issue 2: Effect of Clause 8 in the 

underlying insurance

 30. It is important to bear in mind the 

context in which this issue is raised. The 

reinsurers contend that HIH was not liable to 

the underlying assured on various grounds, 

some of which can be categorised as 

coverage issues (e.g. the loss was not 

fortuitous, the loss attributable to the failure

to complete the full slate was not an insured

risk, etc.) and some of which can be 

categorised as breach of warranty issues

(e.g. the failure to complete the slate, 

agreement to reduce the size of the slate,

etc.). It is the case of HIH that, by virtue of 

Clause 8 of the wording, these matters 

afforded it no defence to LDT's claim.

 31. As I understood it, HIH placed 

particular reliance in the context of coverage 

issues to the second sentence of Clause 8 

and, in effect, extracted from it the 

proposition that it reflected an irrevocable 

agreement on the part of HIH not to rely on 

any defence which it might have against the 

insured. This would unquestionably 

constitute a startling agreement since it 

would render the cover no less than an ondemand performance bond which must

respond to any, or at least any honest, claim.

I agree with the Defendants that such a 

conclusion involving the removal from the

agreement of the basic ingredients of a 

contract of insurance is one which the court 

would only reach in the face of the clearest 

language: see Tor Line v. Alltrans [1984] 1 

WLR 476.

 32. In my judgment, the concluding phrase 

"so as to deny payment of any amount due 

hereunder in accordance with the express 

terms hereof" makes it plain that the waiver

is in respect of defences akin to rights of setCopr. © West 2004 No Claim to Orig. Govt. Works 

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off or counterclaim. It is the very antipathy 

of a waiver of coverage defences where, by 

definition, an amount is not due to be paid. 

This conclusion also puts paid to any 

reliance on the second sentence in regard to 

a breach of warranty.

 33. In any event, as regards breach of 

warranty, HIH were minded to place more 

particular reliance on the first sentence. The 

submission was that a breach of warranty

fell within "any other similar grounds". I do 

not agree. It is not similar (nor was it 

suggested to be) to "invalidity or

unenforceability" of the arrangements with 

Flashpoint. Nor is it similar to "nondisclosure or misrepresentation". The effect 

of breach of warranty is to discharge the 

insurer from liability. Non-disclosure or

misrepresentation gives rise, consistent with 

the terms of the clause, to rights of

avoidance, rescission and rejection.

Issue 3: Was clause 8 incorporated into 

the reinsurance contract?

 34. Here the reinsurers part company. New 

Hampshire accept that Clause 8 forms part 

of the reinsurance contract by virtue of the 

condition that "this reinsurance is subject to

all terms, clause and conditions as original 

". Axa and Independent do not. Although the 

matter does not call for decision at this 

stage, there may be a factual justification for

distinguishing between Axa and 

Independent in that the former appears to 

have scratched a copy of the wording in July 

but the latter did not. This disparity explains 

the alternative formulation of the issue.

 35. It is convenient to start with the 

question whether the reference in the 

reinsurance slips to "Cancellation Clause as 

Original Policy" is a specific reference to

Clause 8. It certainly is not entitled as such 

and its content, insofar as it touches on the 

availability of rights of cancellation, 

excludes or waives them. Indeed, it is 

perhaps better classified as a "noncancellation" clause.

 36. In this connection, some reliance was 

placed in the oral argument on the expert 

evidence. I had put before me two experts'

reports. Neither of the authors was called to 

give oral evidence. The primary purpose of 

the reports was express opinions on the 

usualness of clause 8. I am doubtful of the 

admissibility of their views on the 

significance of the reference to a 

cancellation clause in the original policy.

Suffice it to say that one expert suggested 

that the clause referred to was Clause 8 

while the other suggested Clause 4.3.

 37. I do not think this latter option is 

arguable. The choice, as I see it, is between

there being no such clause and Clause 8. If 

possible, it is desirable to give some

meaning to the specific identification of this 

clause. On balance, I prefer the conclusion

that, on its proper construction, it refers to 

Clause 8. If this be right, I would further 

conclude that the clause would be thereby 

incorporated. This would be on the basis that 

the express reference to Clause 8 made by 

virtue of the condition is sufficient to render 

the reinsurers aware of the clause so as not 

to inhibit incorporation of the clause on this

ground (and to put them at the least on 

enquiry for the purposes of disclosure).

 38. However, I may be wrong about this, a 

possibility all the more likely given that 

such a contention is not, as I read it, any part 

of the pleaded case of HIH. Accordingly, I 

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go on to consider whether the clause has 

been included by reason of the general 

words of incorporation. The starting point is 

the presumption, already referred to, that the 

purpose and impact of such a provision is to 

make the arrangements back to back: see 

Citadel Ins. v. Atlantic Union [1982] 2 

Lloyd's Rep. 543 per Kerr L.J. at p.546.

 39. I have been referred to a number of 

cases that have considered the effect of such 

general words in the fields of insurance and 

carnage of goods. I would summarise their 

effect as follows. Incorporation of a specific 

term (or condition) is only achieved if: 

 i. The term is germane to the reinsurance. 

 ii. The term makes sense, subject to 

permissible "manipulation", in the context of

the reinsurance. 

iii. The term is consistent with the express

terms of the reinsurance. 

iv. The term is apposite for inclusion in 

the reinsurance.

 40. Is Clause 8 germane to the reinsurance? 

In my judgment, it is. It may not be part of

the central definition of the risk. But it is 

material to the nature and scope of the risk 

in the same way as an exceptions clause is

germane to the shipment, carriage and 

discharge of goods under a bill of lading: see 

Thomas v. Portsea [1912] AC 1. The clause 

is not collateral, as for example with an

arbitration clause or choice of law or

jurisdiction clause: see Pine Top Ins. Co. v. 

Unione Italiana Anglo-Saxon Reinsurance 

Co. [1987] 1 Lloyd's Rep.476, Excess Ins. 

Co v. Mander [1997] 2 Lloyd's Rep. 119. 

The dividing line is most eloquently 

expressed, albeit in the context of a 

construction dispute, in the judgment of Sir 

John Megaw in Aughton Ltd. v. M.F.Kent

Services Ltd. [1991] 31 Con. L.R. 60 at 

p.86ff.

 41. Does Clause 8 make sense? Whilst the

references to arrangements with Flashpoint 

are not directly apposite, only a minor

adaptation is required to make the clause 

workable in the context of the reinsurance.

In short, the reference to the "Insurer" needs

to be replaced by "Re-insurer" and the

reference to the "Assured" by "Re-assured".

I regard such manipulation as appropriate 

and permissible: see e.g. CAN International 

Insurance Co. Ltd. v. Companhia de Seguros 

Tranquillidade SA [1999] CLC 140.

 42. Is the term consistent? It certainly does 

not contradict any of the express terms of 

the reinsurance contact: cf. Home Ins Co. of 

New York v. Victoria-Montreal Fire Ins. Co.

[1907] AC 59, Australian Widows v. 

National Mutual Life [1914] AC 615 .

 43. Is the term in some other respect 

inapposite? It was argued by reinsurers that 

incorporation of the clause was 

inappropriate. The major theme to this 

submission was that, unlike the reinsured, 

the reinsurers could not rely upon the terms

of the side agreements that contained

warranties to the effect that there had been 

no non-disclosures or misrepresentations 

during the placement.

 44. This point, in my view, begs the 

question, since reinsurers could exercise 

rights of subrogation under the side 

agreement in the event they were deprived

of a defence under Clause 8 in 

circumstances giving rise to a claim under

the side agreement. Where, as I have 

indicated, the set-up is akin to a fronting

arrangement, I see nothing inapposite in 

treating Clause 8 as incorporated in the 

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Reinsurance slip.

 45. This leaves a further point taken by 

both Axa and Independent to the effect that 

Clause 8 could not be incorporated by the 

general words since it was unusual. The first 

point to be grappled with here is the issue of 

fact whether the clause is unusual (although 

there is an element of unreality here in that 

insurance cover of this class in the U.K. has 

no standard terminology or forms). As

already mentioned, I have had the benefit of

expert evidence on this topic. Mr. Day, 

retained by HIH, had considerable 

experience of financial "risk" insurance on 

the London market: Mr. Godfrey had 

considerable experience of financial 

"guarantee" insurance in the U.S.. Neither 

was called to called to give oral evidence.

 46. It was clear that there were significant 

differences between the two markets. 

(Indeed, it would appear that the standard

form financial guarantee policies issued on 

the American market not only do not have, 

but can have no place for, a clause 8

equivalent since they are in terms 

unconditional and irrevocable.) I have thus 

felt it right to impose much greater reliance 

on the views of Mr. Day. As I understood 

his evidence, clauses such as clause 8 are 

often requested by the assured in this class

of business and are sometimes agreed, more 

often where there are collateral agreements.

 47. Quite where this leaves the clause on 

the spectrum from usual to unusual is not 

easy to identify. At one extreme, I do not 

categorise it as inconscionable or 

extortionate: at the other, it is not standard 

or customary. For present purposes, I am 

disposed to proceed on the assumption that 

it is arguable (and as I understand it, the 

issue is not for determination at this stage)

that a fair presentation of the risk would 

involve its disclosure: mere notice of there 

being terms applicable to the underlying 

policy might not be sufficient to put 

reinsurers on inquiry: see Property Ins. Co. 

v. National Protector Ins. Co. [1913] LT 

104, C.T.I. v. Oceanus [1984] 1 Lloyd's

Rep. 476per Kerr L.J. at p. 498. (However, I 

recognise that, if there is notice adequate 

enough to allow incorporation (see below), 

it may be a rare case where the same notice 

is not adequate to discharge the obligation of

good faith.)

 48. More directly in point for present 

purposes was the reliance by Axa and New 

Hampshire on a passage in MacGillivray on 

Insurance Law 9th Ed. at para. 33-52 to 

the following effect: -- 

A difficulty has arisen where the original 

insurance contract contains an unusual term 

about which the reinsurer is unaware at the 

time when incorporation is agreed. It has 

been held that a reinsurer is not bound by 

the incorporation of terms unless they are 

well known and in common use. The 

reasoning is that the reinsurer may not be 

entitled to see, or will not in practice be

aware of, the precise terms of the underlying 

insurance. It is submitted that the fact that a

clause is highly unusual may be 

 relevant to the question whether the 

parties intended that clause to be 

incorporated into their contract.

 49. It is certainly right that it has been held 

that reinsurers are bound by usual or 

customary terms in the underlying policy 

even when they extend or expand the scope 

of the reinsurers' liability: put another way 

that commonplace terms can even override

an inconsistency : see Marten v. The Nippon 

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Sea and Land Ins. Co. (1898) 3 Com. Cas.

164, Charlesworth v. Faber (1900) 5 Com. 

Cas. 508. Whether general terms of 

incorporation can import an unusual or 

uncommon term is quite a different 

question. In my judgment, the issue is to be 

approached as a matter of general principle 

in the light of such decisions as Interfoto

Picture Library Ltd. v. Stiletto Visual 

Programmes Ltd. [1989] QB 433. I 

particularly bear in mind the judgment of 

Bingham L.J. who concluded that failure to 

draw attention to an onerous clause might 

prevent reliance upon it. He summarised his 

approach as follows:-- 

 The tendency of the English authorities 

has, I think, been to look at the nature of the 

transaction in question and the character of 

the parties to it; to consider what notice the 

party alleged to be bound was given of the 

particular conditions said to bind him; and to 

resolve whether in all the circumstances it is 

fair to hold him bound by the condition in

question.

 50. The following seem to me to be the

most material considerations: 

 i. This is a contract of reinsurance, which 

is intended to be back to back with the 

underlying insurance. 

ii. It is expressly subject to "all" terms 

and to 'follow that placement in all 

respects". 

iii. The clause in question is in no sense

unique in this class of insurance, particularly

where there is a collateral agreement. 

 iv. The slip records that information is

available on the brokers' file: this would 

have included drafts of the wording. 

v. As a matter of commercial 

convenience, it is desirable that all 

reinsurers subscribing to the same slip 

should contract on the same terms. 

vi. Insofar as aspects of good faith arise, 

individual reinsurers may be able to avoid 

the policy if the presentation to them, 

including considerations of notice of the 

clause, was unfair.

 51. In these circumstances, I conclude that,

even if the condition in the slip referring to 

the cancellation clause was not thereby

making reference to Clause 8 or, even if it 

was, such was not sufficient in itself to 

incorporate that clause, it is fair nonetheless

to all the Reinsurers to treat the clause as 

incorporated by the general words.

Issue 4: Effect of Clause 8 in the 

reinsurance contract

 52. I reject the submission that the effect is

solely to agree to follow settlements made 

by HIH where otherwise HIH would have 

had a defence. The focus therefore is on the 

extent to which the clause is apt to exclude

reliance on remedies in relation to nondisclosure and misrepresentation by the 

reinsured. It is conceded by reinsurers that

the clause prohibits avoidance on the 

grounds of innocent non-disclosure and 

innocent misrepresentation. At the other end 

of the spectrum, there are in fact no

allegations of fraud against HIH or its 

agents. (For the record, I hold that it is not 

open to a party to exclude liability for his 

own fraud in inducing the contract: see S 

Pearson & Son Ltd. v. Dublin Corp. [1907] 

AC 351. I have also been asked to confirm 

that Clause 8 has no effect in the face of an 

allegation of illegality, for instance the

newly pleaded case of wagering. I do so 

confirm, although illegality in relation to 

arrangements with Flashpoint might be a 

different matter.)

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 53. There have been two recent decisions

in which similar issues arose. In Toomey v. 

Eagle Star Ins. Co. Ltd (No.2). [1995] 2 

Lloyd's Rep. 88 , the relevant clause read: 

This contract is neither cancellable nor 

voidable by either party. Having directed 

himself on the principles of construction to 

be derived from Canada SS.Lines Ltd v. The 

King [1952] AC 192, Colman J. concluded 

that the clause did not exclude avoidance for 

negligent non-disclosure or

misrepresentation primarily because there 

was no exclusion of a remedy in damages.

 54. In HIH Casualty and General Ins. Ltd 

v. Chase Manhattan Bank [2000] All ER (D) 

1120, there was an elaborate clause, the 

most pertinent section of which read: the 

Insured will not have any duty or obligation 

to make any representation, warranty or 

disclosure of any nature, express or implied 

(such duty and obligation being expressly 

waived by the insurers) and shall have no 

liability of any nature to the insurers for 

information provided by any other parties 

and any such information provided by or 

non-disclosure by other parties ... shall not 

be a ground or grounds for avoidance of the 

insurers' obligations under the policy or the 

cancellation thereof.

 55. Aikens J. took the view that, since the 

pre-contractual duties of nondisclosure and 

misrepresentation that arise in the insurance

context are unitary and absolute, there being 

no need to establish negligence and only the 

remedy being by way of avoidance, the 

Canada Steamship case was not directly 

applicable. Nonetheless he decided the 

exclusion covered neither

deliberate concealment nor negligence. 

Particular emphasis was placed in this

context on clear wording in another clause 

that expressly excluded an indemnity for 

loss arising from "any fraud, 

misrepresentation or concealment by the 

Insured."

 56. Each such exclusion must be 

considered in the light of its own terms and 

its own context. I do not believe that the 

issue is much advanced by considering the 

application or otherwise of the Canada 

Steamshipcase. I accept that it is necessary

to discern a clear intention to exclude the

consequences of a breach of a duty of good 

faith. In the present case, no point arises as 

to the extent to which the remedies for

deliberate concealment or misstatement is 

excluded. However, I have concluded that 

the parties did intend to exclude the

consequences of inadvertent concealment or 

misrepresentation whether careless or not.

My reasons are: 

i. The insurer expressly forgoes rights of 

avoidance, rejection of any claim or any 

remedy for non-disclosure or

misrepresentation. 

 ii. The obligations of good faith are 

indeed unitary and absolute: the

establishment of a negligent misstatement 

adds nothing: the very concept of a 

negligent non-disclosure is not easy to 

grasp. 

iii. There is no indication in the rest of the

policy wording that the parties were minded 

to distinguish between deliberate, careless 

and accidental activity. 

 iv. The introductory words "to the fullest 

extent permissible by applicable law" on 

their natural meaning accord the widest 

possible scope to the exclusion. I reject the 

submission that it means no more than: 

"Avoidance for innocent misrepresentation 

or non-disclosure is not permitted, unless the 

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law prohibits such an exclusion".

Conclusion

I am extremely grateful to all counsel for 

their detailed oral and written submissions. I 

shall need their further assistance in

formulating the answers to the Preliminary 

Issues in the light of this judgment.

Crown Copyright.

END OF DOCUMENT

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Exhibit B 

B. Copy of Opinion in HIH Casualty and General Ins. Co. v. New Hampshire Ins. 

Co., 2001 Lloyd’s Rep. IR 596 (Court of Appeal, Civil Division, May 21, 2001) (Rix, LJ.). 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 38 of 115
[2001] 2 Lloyd's Rep. 161 Page 2

2001 WL 513044 (CA (Civ Div)), [2001] C.L.C. 1480, [2001] Lloyd's Rep. I.R. 596, [2001] 2 

Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

*161 HIH Casualty and General Insurance 

Ltd. v. New Hampshire Insurance Co. 

and Others 

 

Court of Appeal 

 

CA 

Feb. 13, 14, 15; May 21, 2001; May 21, 

2001 

 

Before Lord Justice Peter Gibson, Lord 

Justice Mummery and Lord Justice Rix 

 

Reinsurance - Indemnity - Warranty - 

Allegations of breach - Reinsurers denied

liability - Whether reinsurers correctly 

identified terms in underlying insurance 

contracts as warranties - Effect of 

"Disclosure and/or Waiver of rights" clause 

in underlying insurance contract - Whether 

clause incorporated into reinsurance 

contracts - Effect of clause in reinsurance 

contracts. 

The claimants (HIH) had underwritten two 

film finance insurance policies concerning

two separate groups of films: one with 

regard to a number of films to be coproduced by 7.23 Productions LLC and 

Flashpoint Ltd. (the "7.23 slate"); the other 

with regard to a number of films to be coproduced by Rojak Films Inc. and 

Flashpoint Ltd. (the "Rojak slate"). The 

insured was Law Debenture Trust (LDT). 

The insurance was a pecuniary loss

indemnity insurance and was to indemnify 

LDT if at the end of a defined period there 

was a shortfall between the amount of 

finance provided and the revenue collected.

The pecuniary loss indemnity policy in

respect of the 7.23 Productions, dated Aug. 

22, 1997, contained various terms including 

the following: 

Clause 8 Disclosure and/or Waiver Of 

Rights 

8.1 To the fullest extent permissible by 

applicable law, the Insurer hereby agrees

that it will not seek to or be entitled to avoid

or rescind this Policy or reject any claim 

hereunder or be entitled to seek any remedy 

or redress on the grounds of invalidity or 

unenforceability of any of its arrangements 

with Flashpoint Ltd. or any other person (or 

of any arrangements between Flashpoint 

Ltd. or the Purchaser) or non-disclosure or 

misrepresentation by any person or any 

other similar grounds. The Insurer 

irrevocably agrees not to assert and waives

any and all defences and rights of set-off 

and/or counterclaim (including without 

limitation any such rights acquired by 

assignment or otherwise) which it may have 

against the Assured or which may be

available so as to deny payment of any 

amount due hereunder in accordance with

the express terms hereof.

The slip policy in respect of the Rojak 

Films Inc. was in broadly similar terms to 

that in respect of 7.23 Productions.

HIH reinsured its liability under both 

policies. Axa Reassurance S.A. (Axa) and

New Hampshire Insurance Co. Ltd. were 

reinsurers in respect of both policies and

Independent Insurance Co. Ltd. were 

reinsurers in respect of the 7.23 policy only.

HIH having paid LDT sums totalling over 

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[2001] 2 Lloyd's Rep. 161 Page 2

2001 WL 513044 (CA (Civ Div)), [2001] C.L.C. 1480, [2001] Lloyd's Rep. I.R. 596, [2001] 2 

Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

U.S.$31 m. sought to recover under the 

reinsurance agreements. The reinsurers

refused to indemnify HIH on the grounds 

that HIH should not have paid LDT or

alternatively that, whatever the position 

under the insurance contract they were not 

obliged to pay under the reinsurance 

contracts for various reasons including 

breaches of warranty and breaches of the 

duty of good faith.

 The reinsurers contended that the 

underlying insurance contained a warranty 

to the effect that a slate of six or 10 films

respectively would be made and that the 

reinsurance contained such a warranty and a 

further warranty that the insurers would 

obtain the consent of reinsurers to any 

amendment to the terms of the underlying 

insurance.

The claimants submitted that cl. 8 of the 

policy wording disabled them from relying 

on any breach of warranty by the original 

assured and that as cl. 8 was a term of the 

reinsurance it precluded the reinsurers from 

relying on any breach of warranty and 

further precluded the insurers from relying 

upon any mispresentation or non-disclosure 

unless the same was fraudulent.

The following preliminary issues were 

ordered to be determined: 

1 Are the terms (of both the insurance 

contracts and reinsurance contracts) alleged 

by the Reinsurers to have been warranties in 

fact such? 

2 What is the effect of Clause 8 of the 

underlying insurance contract? In particular 

does it mean that the facts and matters

alleged in the defences (if true) would not 

have provided the Claimant 

Insurer/Reinsured with a defence (whether 

in whole or in part) to the underlying 

Insured's claim?

 3 On the assumption that the Reinsurers'

underwriters were aware that the underlying 

policy wording contained Clause 8, was

Clause 8 a term of the reinsurance contract? 

Is the answer different if the underwriters

were not so aware?

4 What is the effect of Clause 8 in the 

context of the reinsurance contracts? In

particular does it mean that: 

i The facts and matters alleged in the 

defences and counterclaims (if true) do not 

provide the Defendant Reinsurers with a 

(complete or partial) defence (including by 

way of set-off) to the Claimants 

Insurers/Reinsured's claim; and/or 

ii the Defendant's Reinsurers do not (or 

did not) have the right to avoid the 

reinsurance contract on grounds of 

misrepresentation or non-disclosure 

(assuming they otherwise have or had such a 

right) irrespective of whether or not the 

relevant misrepresentation or non-disclosure 

was negligent or fraudulent as opposed to 

innocent.

Held, by Q.B. (Com. Ct.) (DAVID STEEL,

J.), that 

(1) the underlying policy was contained in 

the slip policy subject to the terms and 

conditions contained in the policy wording 

dated Aug. 22; it was a term of the policy 

that a full slate would be made and that term 

was a warranty; and the reinsurance 

contracts contained the same warranty; 

 *162 (2) the only commercially realistic

construction of the amendment clause 

involved excluding from its application 

immaterial amendments i.e. changes which 

did not affect the sense or substance of the 

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underlying policy in a manner potentially 

prejudicial to the reinsurer; if this was right 

it would be right to categorize the 

amendment clause as a warranty;

(3) the concluding phrase of cl. 8 "so as to 

deny payment of any amount due hereunder 

in accordance with the express terms hereof" 

made it plain that waiver was in respect of

defences akin to rights of set-off or counterclaim; it was the very antipathy of a waiver

of coverage defences where by definition an 

amount was not due to be paid; 

(4) the submission that breach of warranty 

fell within "any other similar grounds" in cl. 

8 would be rejected; it was not similar to 

"invalidity or unenforceability" of the 

arrangements with Flashpoint; nor was it 

similar to "non-disclosure or 

misrepresentations"; the effect of a breach of 

warranty was to discharge the insurer from 

liability; non-disclosure or misrepresentation

gave rise, consistent with the terms of the

clause to rights of avoidance, rescission and

rejection;

 (5) on its proper construction the

reference in the reinsurance slips to

"Cancellation Clause as Original Policy" 

referred to cl. 8; and the clause was thereby

incorporated in the reinsurance contracts;

(6) even if the condition in the slip

referring to the cancellation clause was not 

thereby making a reference to cl. 8 or even if 

it was, such was not sufficient in itself to

incorporate that clause, but it was fair 

nonetheless to all the reinsurers to treat the 

clause as incorporated by the general words; 

 (7) the effect of cl. 8 was not solely to 

agree to follow settlements made by HIH 

where otherwise HIH would have had a 

defence; 

(8) it was necessary to discern a clear 

intention to exclude the consequences of a

breach of duty of good faith; the parties did 

intend to exclude the consequences of 

inadvertent concealment or 

misrepresentation whether careless or not.

HIH appealed and the reinsurers crossappealed the issues for decision being: (i) 

whether it was a term of the original slip 

policy that six films (or in the case of the 

Rojak slate 10 films) would be completed; 

(ii) whether the six film term was a term of 

the policy wording; (iii) whether the policy 

wording superseded the original slip policy;

(iv) whether the six film term was a term of

the reinsurance slip policy; (v) if a term of 

any of the insurances whether the six film

term was a warranty; (vi) whether the term 

in the reinsurance slip policy that HIH 

agreed to consult and obtain reinsurers'

agreement to all amendments was a 

warranty; (vii) whether cl. 8 covered and 

excluded breach of warranty defences; (viii)

whether cl. 8 covered and excluded 

negligent misrepresentation and nondisclosure; (ix) whether cl. 8 was

specifically incorporated into the 

reinsurance contracts by reason of the term

therein "Cancellation clause as Original 

Policy"; (x) if there was no specific

incorporation of cl. 8 whether it was 

incorporated into the reinsurance contracts

by reason of general words of incorporation; 

(xi) for these purposes whether it made any 

difference whether cl. 8 was an unusual 

term; whether it was an unusual term;

whether incorporation of such a term was 

fair; (xii) for these purposes whether it made 

any difference whether a reinsurer was 

aware of cl. 8; (xiii) if cl. 8 was incorporated 

into any reinsurance contract, what was its 

effect there? (xiv) whether the six film term

was a term of the original slip policy.

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(Cite as: [2001] 2 Lloyd's Rep. 161)

Held, by C.A. (PETER GIBSON,

MUMMERY and RIX, L.JJ.), that 

(1) the slip policy stated against the word 

"INTEREST" that "7.23 Productions will 

produce and make six made-for-TV films"; 

having regard to the need for the revenues of

each film to cross-collateralize with the 

revenues of each other film there could be 

no doubt that it was a term of the insurance 

that the stipulated number of films would be 

made; and the original slip policy contained 

a term that six films would be produced and 

made (see p. 175, cols. 1 and 2); 

(2) the making of the films was inherent 

in talk of their failure to generate revenues; 

unless made they could not be revenue 

generating and it was their failure to

generate revenue which was at the heart of 

the risk underwritten; "the failure of the 

Projects to generate a balance. . ." meant or

necessarily implied that there would be six 

films to generate a balance whose failure to

do so in sufficient quantities would produce 

an insured loss; an insured loss could only 

occur if the "projects" had failed to generate

sufficient funds in the relevant account (see 

p. 176, col. 1); 

(3) it was not necessary to decide the 

issue whether the slip policy was superseded

by the policy wording but it appeared it was 

not; the policy wording itself could be and 

ought to be construed against the 

background of the original slip policy; that 

produced the result both that there was no 

reason to think that the term "7.23 

Productions will produce and make six

made-for-TV films" ever ceased to be a term

of the insurance, and that in any event the 

policy wording's construction was further 

strengthened by reference to the wording of 

the original slip policy (see p. 181, cols. 1 

and 2); 

(4) the six film term was a term of the

reinsurance slip policy (see p. 181, col. 2); 

(5) once the six film term was established 

as a term of the insurance or reinsurance 

contract, the grounds for holding it to be a 

warranty were very strong; it was a question 

of construction and the presence or absence 

of the word "warranty" or "warranted" was 

not conclusive; the six film term was a term 

which went to the root of the transaction; it 

was descriptive of or bore materially on the 

risk of loss; and damages would be an 

unsatisfactory or inadequate remedy; and 

once the six film term was seen as being a 

term of the insurance, whether set out as it 

was in the original slip policy or derived

from the construction of the policy wording, 

it was immediately clear that it was the

essence of the risk underwritten; if the slate 

of (six) films was made with the moneys 

invested the insurers would indemnify the 

investors against the loss (see p. 182, cols. 1 

and 2); 

 (6) the term of the reinsurance policy that

HIH agreed to consult and obtain the

reinsurers' agreement to all amendments was

a warranty (see p. 182, col. 2; p. 183, cols. 1 

and 2); 

 *163 (7) the learned Judge was right to 

reject the submission that cl. 8 contained a 

defence to breaches of warranty (see p. 184, 

col. 1; p. 185, col. 2); 

(8) cl. 8 covered and thus excluded a 

defence based on negligent 

misrepresentation and non-disclosure; the 

language of the clause was very wide; its 

opening words were words of saving but 

they emphasized that the language of the 

clause was intended to be read as widely as

it properly could be; and there was no reason 

why the words "any claim. . .any remedy or 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

redress on the grounds of. . .non-disclosure 

or misrepresentation. . .or any similar 

ground" did not embrace a claim based on 

negligent non-disclosure or s. 2 of the 

Misrepresentation Act, 1967 (see p. 188, col. 

1); 

(9) it would be wrong to find in the term 

"Cancellation Clause as Original Policy" a 

specific reference to cl. 8; and the reference 

to a "cancellation clause" simply failed to 

have content; if that was wrong and the

reference was to cl. 8 then cl. 8 would have 

been incorporated into the reinsurance 

contracts (see p. 189, cols. 1 and 2; p. 190, 

col. 1); 

 (10) on the assumption that the insurances 

were intended and reinsurance contracts

were intended to be back to back and that 

the set up was akin to a fronting 

arrangement cl. 8 could not be incorporated 

in manipulated form into the reinsurance

contracts; it did not make sense, could not 

be successfully manipulated and even if it 

could be could have an effect contrary to the 

reason of the thing; the incorporation of cl. 8 

in unmanipulated form would make sense 

and would be apposite; cl. 8 was germane to

the reinsurance; in its unmanipulated form it 

was a form of "follow the settlement" clause 

and nothing could be more germane to a 

reinsurance than a form of follow the

settlement clause; cl. 8 was not a collateral 

clause; and cl. 8 was not to be regarded as 

incorporated into the reinsurance contracts

in its manipulated form but could properly 

be regarded as incorporated in its 

unmanipulated form (see p. 193, cols. 1 and 

2; p. 194, cols. 1 and 2; p. 195, cols. 1 and 

2); 

(11) on the evidence the learned Judge 

was perfectly entitled to find that clauses

such as cl. 8 were sometimes agreed 

particularly when supported by a collateral 

agreement even though not standard or 

customary; the clause was not 

unconscionable or extortionate and the 

clause was unusual but something which the 

market would recognize; the terms of the 

reinsurance slip policy that the reinsurance

was subject to all the terms as original 

together with the invitation to consult the

information held on the brokers file 

collectively placed on the reinsurers the

burden of showing that cl. 8 was not 

incorporated or that the proposal was

unfairly presented (see p. 198, col. 1; p. 200, 

col. 1); 

(12) if a reinsurer was actually or 

constructively aware of cl. 8 then plainly it 

could not be said that it had not had 

sufficient notice of it; if however cl. 8 could 

only become part of the reinsurance contract 

if the reinsurer had actually agreed to it then

it would be necessary to show that the clause 

had been actually agreed and not merely that 

sufficient notice of it had been given (see p. 

200, col. 1); 

 (13) the effect of cl. 8's incorporation into 

the reinsurance contracts was to bind the

reinsurers to pay, despite any non-disclosure 

or misrepresentation cov- ered by the clause 

in circumstances where the non-disclosure 

or misrepresentation in question was the 

same at each level of the placement (see p.

201, col. 1).

The following cases were referred to in the

judgment of Lord Justice Rix:

American Airlines Inc. v. Hope, (H.L.) 

[1974] 2 Lloyd's Rep. 301;

 Aughton Ltd. v. M. F. Kent Service Ltd., 

[1991] 31 Con.L.R. 60;

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2001 WL 513044 (CA (Civ Div)), [2001] C.L.C. 1480, [2001] Lloyd's Rep. I.R. 596, [2001] 2 

Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

 Bank of Nova Scotia v. Hellenic Mutual 

War Risks Association (Bermuda) Ltd. (The 

Good Luck), (H.L.) [1991] 2 Lloyd's Rep. 

191; [1992] 1 A.C. 233;

 Banque Keyser Ullmann S.A. v. Skandia 

(UK) Insurance Co. Ltd., (H.L.) [1990] 2 

Lloyd's Rep. 377; [1991] 2 A.C. 249;

 Barnard v. Faber, [1893] 1 Q.B. 340;

 CNA International Insurance Co. Ltd. v. 

Companhia de Seguros Tranquillidade S.A., 

[1999] C.L.C. 140;

 Caledonia (E.E.) Ltd. v. Orbit Valve Co., 

[1994] 2 Lloyd's Rep. 239; [1994] 1 W.L.R. 

1515;

 Canada Steamship Lines Ltd. v. The King, 

(P.C.) [1952] 1 Lloyd's Rep. 1; [1952] A.C. 

192;

Charlesworth v. Faber, (1900) 5 Com. Cas. 

508;

Citadel Insurance Co. v. Atlantic Union 

Insurance Co. S.A., (C.A.) [1982] 2 Lloyd's

Rep. 543;

 Ellinger & Co. v. Mutual Life Insurance 

Co. of New York, [1905] 1 K.B. 31;

Excess Insurance Co. Ltd. v. Mander, 

[1997] 2 Lloyd's Rep. 119;

 Forsikringsaktieselskapet Vesta v. Butcher, 

(H.L.) [1989] 1 Lloyd's Rep. 331; [1989] 

A.C. 852;

Gan Insurance Co. Ltd. v. Tai Ping 

Insurance Co. Ltd., [1999] Lloyd's Rep. IR 

472;

Groupama Navigation et Transports v. 

Catatumbo C.A. Seguros, [2000] 2 Lloyd's

Rep. 350;

HIH Casualty and General Insurance Ltd.

v. Chase Manhattan Bank, [2001] 1 Lloyd's

Rep. 30;

 Hill v. Mercantile and General Reinsurance

Co. Plc. , (H.L.) [1996] L.R.L.R. 341; 

[1996] 1 W.L.R. 1239;

 Holme v. Brunskill, (1877) 3 Q.B.D. 495;

Insurance Co. of Africa v. Scor (UK) 

Reinsurance Co. Ltd., [1985] 1 Lloyd's Rep. 

312;

 Interfoto Picture Library Ltd. v. Stiletto

Visual Programmes Ltd., (C.A.) [1989] 

Q.B. 433;

 Ionides v. Pacific Fire & Marine, (1872) 

L.R. 7 Q.B. 517; (1871) L.R. 6 Q.B. 674;

 Lower Rhine and Wurtemberg Insurance

Association v. Sedgwick, (1899) 1 Q.B. 179;

 *164 Marten v. The Nippon Sea and Land 

Insurance Co. , (1898) 3 Com. Cas. 164;

 Mann and Holt v. Lexington Insurance Co., 

(C.A.) [2001] 1 Lloyd's Rep. 1;

 Miramar Maritime Corporation v. Holborn 

Oil Trading Ltd. (The Miramar), (H.L.) 

[1984] 2 Lloyd's Rep. 129; [1984] A.C. 676;

 New Hampshire Insurance Co. v. MGN 

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Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

Ltd., [1997] 1 L.R.L.R. 24;

 Norwich Union Fire Insurance Society v. 

Colonial Mutual Fire Insurance Co. Ltd., 

(1922) 12 Ll.L.Rep. 215 ; [1922] 2 K.B. 

461;

Pan Atlantic Insurance Co. Ltd. v. Pine

Top Insurance Co., (C.A.) [1993] 1 Lloyd's 

Rep. 496;

 Pearson (S.) & Son Ltd. v. Dublin 

Corporation , (H.L.) [1907] A.C. 351;

 Pine Top Insurance Co. v. Unione Italiana 

Anglo-Saxon Reinsurance Co., [1987] 1 

Lloyd's Rep. 476;

 Punjab National Bank v. de Boinville, 

(C.A.) [1992] 1 Lloyd's Rep. 7; [1992] 1 

W.L.R. 1138; [1992] 1 Lloyd's Rep. 7;

St. Paul Fire & Marine Insurance Co. (UK) 

Ltd. v. McConnell Dowell Constructors 

Ltd., (C.A.) [1995] 2 Lloyd's Rep. 116; 

[1993] 2 Lloyd's Rep. 503;

 State Trading Corporation of India Ltd. v. 

M. Golodetz Ltd., (C.A.) [1989] 2 Lloyd's 

Rep. 277;

Svenska Handelsbanken v. Sun Alliance

and London Insurance plc., [1996] 1 Lloyd's

Rep. 519;

Thomas (T.W.) & Co. Ltd. v. Portsea 

Shipping Co. Ltd., (H.L.) [1912] A.C. 1;

Thompson v. Adams, (1889) 23 Q.B.D. 

361;

Toomey v. Eagle Star Insurance Co. Ltd. 

(No. 2) , [1995] 2 Lloyd's Rep. 88;

 Tor Line A.B. v. Alltrans Group of Canada 

Ltd., (H.L.) [1984] 1 Lloyd's Rep. 123; 

[1984] 1 W.L.R. 48;

 Xenos v. Wickham, (1867) L.R. 2 H.L. 

296;

Youell v. Bland Welch & Co. Ltd., (C.A.) 

[1992] 2 Lloyd's Rep. 127; [1990] 2 Lloyd's

Rep. 423.

 This was an appeal and a cross-appeal by 

the claimant HIH Casualty and General 

Insurance Ltd. and the defendants New 

Hampshire Insurance Co., Independent 

Insurance Co. and Axa Reassurance S.A. 

from the judgment of Mr. Justice David 

Steel [2001] 1 Lloyd's Rep. 378) on the 

issue as to whether the claimant was entitled 

to claim an indemnity under the reinsurance 

policies issued by the defendants in respect 

of claims paid by the claimants to their 

insured.

Representation

Mr. Julian Flaux, Q.C. and Mr. Simon 

Picken (instructed by Messrs. Holman 

Fenwick & Willan) for the claimants; Mr.

Christopher Hancock, Q.C. and Ms. Sara 

Masters (instructed by Messrs. Kennedys) 

for New Hampshire; Mr. Stephen Ruttle,

Q.C. and Mr. Tom Adam (instructed by 

Messrs. Davies Lavery) for Independent; 

Mr. Peter Gross, Q.C. , Mr. Philip Edey and 

Mr. Michael Collett (instructed by Messrs.

D. J. Freeman) for Axa.

The further facts are stated in the judgment 

of Lord Justice Rix.

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 Judgment was reserved.

 Monday May 21, 2001

JUDGMENT

 Lord Justice RIX:

Introduction

1. Film production is a risky business. Just 

how risky was something that the parties to 

this appeal, insurer and reinsurers of two 

slates of "made for TV" films, discovered to 

their cost. The insurer HIH Casualty & 

General Insurance Ltd. ("HIH"), has paid

over U.S.$31 m. to the investors in these 

films, and seeks recovery against three of 

the reinsurers concerned, Axa, Independent 

and New Hampshire, who say, however, that 

they are not liable.

2. The insurance concerned is of a 

somewhat novel kind. It is of a class called

"pecuniary loss indemnity" insurance. In

essence it provides collateral for film

finance. The peril insured is the risk that 

revenues from the films concerned will fail 

to reach the sum insured within a certain 

period. The sum insured is premised on the 

costs of production. The insurance is 

designed to enable the investors whose 

finance supports the production of the films

to recoup their investment. Either they are 

paid from the films' revenues, or from the

insurance, or from a combination of the two. 

If the films are successful, the insurer is not 

called upon to make any payment. If the 

films earn nothing whatsoever, the insurer is 

liable to pay the whole sum insured. If the

films earn something but not enough, the 

insurer makes up the difference, up to the

sum insured. The account is struck at a fixed

date. The insurer may, however, manage to 

recoup more or less of its loss either from 

later earnings of the films, or from other 

protection or collateral for which he

stipulates and upon which he may have 

either a direct or a subrogated claim.

3. It appears that this kind of insurance has 

proliferated in recent years, and that there 

are *165 potentially many cases which may, 

in some respect or other, be guided by this 

appeal. Apart from the judgment under 

appeal, which is that of Mr. Justice David 

Steel ([2001] 1 Lloyd's Rep. 387), there has 

been only one other decision in this field, 

and that is HIH Casualty and General 

Insurance Ltd. v. Chase Manhattan Bank, 

[2001] 1 Lloyd's Rep. 30. There is, however, 

very little overlap between the two cases.

4. If this kind of insurance is novel, at any 

rate to the English Courts, it bears some

resemblance to commercial mortgage

indemnity insurance, under which a lender 

of an advance secured on a mortgage insures 

against the risk that, following a default by 

the borrower, the security will not repay the

principal of the advance, interest and 

associated costs. The point of resemblance is 

that the insurer is not insuring against 

damage or liability but against the risk that 

the insured's investment will not be repaid. 

There are, however, important differences. 

In commercial mortgage indemnity 

insurance, the property concerned is usually 

built and let, and its investment value can, 

subject of course to market fluctuations, be 

assessed, as can the credit-worthiness of the 

borrower. The insurer can therefore evaluate 

whether the loan is likely to be repaid, and it 

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is only if the borrower defaults that the

insurer can be called upon to pay at all. In 

what I shall film finance insurance,

however, the insurer's gamble is much purer.

The films are not yet made, their earning 

potential is peculiarly difficult to evaluate 

and might remain so even when they have 

been made, and the insurer must pay, 

whatever the credit-worthiness of the 

borrower, unless the films quickly earn 

revenues which at least match the sum 

insured.

5. In the circumstances, the premiums

charged in the present case at any rate, are a 

significant percentage of the sum insured, 

namely 10 per cent. HIH was also promised, 

as part of its premium, 7.5 per cent. of 

revenues above the sum insured. Somewhat 

paradoxically, if an insured loss would have 

been avoided, then HIH would have earned 

a larger premium. This interest in the films' 

profits was called a "Back End". Thus, HIH 

as insurer was in a very real sense a form of 

joint venturer in the project. On the

downside, this sense of joint ventureship can 

be seen in the fact that the cost of the 

premium itself played a significant role in

the make-up of the sum insured. One 

example will suffice: in the case of one of

the slates of films whose production finance 

was insured, which I shall call "the 7.23 

slate" by reference to its producer, 7.23 

Productions LLC ("7.23 Productions"), the 

total sum insured was U.S.$16.4 m., of 

which the films' budgets amounted to only 

U.S.$10.9 m., and the balance was made up 

of "interest/fees" of U.S.$3.86 m. and the 

insurance premium of U.S. $1.64 m.

6. Such insurance may be said to play a 

useful role in facilitating film finance and 

thus in the creativity and productivity of the 

film industry. But the danger for insurers is 

that they, albeit relative outsiders to the 

industry, are undertaking the fundamental 

risk of the costs of production. In such 

circumstances, what precautions do they 

take to ensure what may be called due 

diligence on the part of the insured 

financers? What constitutes a fair 

presentation of such risks? And what 

warranties or exceptions do they require for 

undertaking the risk?

7. I pose these questions, but can barely 

provide an answer, for this appeal arises on 

preliminary issues as to the construction of

the insurance and reinsurance policies 

involved, without a trial in which the facts 

of the case have been investigated. For the 

purpose of the trial of the preliminary issues

below before Mr. Justice David Steel, it was 

simply assumed that the facts were as stated 

in the reinsurers' defences. There was no 

live evidence before the Judge, nor any 

witness statements. There were reports from 

two experts, but they were not called for 

cross-examination, and, to the extent that it 

was relevant to his decisions, the Judge had 

to evaluate their opinions without further 

assistance. The placing documents (but I am

not sure they are complete) were before the 

Judge, as they are again on appeal before 

this Court, but they were barely referred to

by the Judge, and have been invoked by 

Counsel on appeal only sporadically. There 

are no agreed facts. There is no agreed

chronology. The assumed facts to be taken 

from the reinsurers' defences have been 

nowhere summarized. In effect, the exercise 

of construction upon which the Judge was 

asked to embark exists in a sort of no man's 

land, in which now and again, some feature 

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looms out of the mist. For instance, the 

Judge referred to, and in this Court we were 

taken to, a collateral agreement, made 

between HIH and a company called

Flashpoint Ltd., which was designed to 

provide HIH with protection to support its 

insurance. Quite what its provisions amount 

to, however, could well be the subject of 

debate, but are not for decision here.

8. In the circumstances, apart from the 

insurance and reinsurance policies

themselves, which exist as items for 

construction, there is, I think, nothing which 

can be regarded as a matter of fact, securely 

found. Any factual matter referred to has a 

sort of provisional quality. It is possible to 

say that a document of some sort exists and

states such and such a thing, but it is 

impossible to affirm with any confidence 

that what is said in any single document is a

secure foundation for some conclusion.

 *166 9. I make these comments at the 

outset because I feel some disquiet about 

conducting the exercise of construction 

which this Court, as the Judge below, has 

been asked to perform, without a clear 

understanding of the factual matrix of these 

novel arrangements. Insurance and 

reinsurance provisions are so often dealt 

with in such brief language, that their 

construction divorced from a firm

understanding of their context can be a 

dangerous process. There is also, for 

instance, a question of fairness in the

incorporation of a term which, as will be 

seen, has to be addressed, which I feel 

unhappy to decide, as it were, in the 

abstract.

10. I wish to say nothing to discourage the 

identification of preliminary issues for 

decision, which can perform a very useful 

function. In recent years, the previous

climate of coolness or even hostility to the 

setting of preliminary issues has warmed 

considerably, and I believe that has been

helpful to the litigants involved. I remain 

concerned, however, that in this case the 

Judge and his Court have been set an 

unusually academic examination paper, and 

in a sub-category of subject which cannot be 

said to be familiar territory. That said, the 

paper must be answered, wherever possible,

as best as can be done, and the problems of 

context must be sought to be overcome

where possible in a way which is fair and

reflects the manner in which the parties have

approached this litigation.

The issues on appeal

 11. It is difficult to introduce the issues 

which were argued on the appeal (by HIH) 

and the cross-appeal (by the reinsurers) in

any really meaningful way without setting 

out a good deal of further information. In 

brief, however, all the issues decided by Mr. 

Justice David Steel at first instance are 

challenged on appeal. Those issues raise 

questions of construction which in most 

cases arise from the structure of the 

insurance and reinsurance itself. Thus, 

where an insurance contract is to be found in 

a "slip policy" which looks forward to 

"policy wording" and that wording emerges 

in the form of a "policy", does that policy 

supersede the slip entirely? Or are the two

documents to be read together? Where read

together or separately, does a term exist that 

a certain number of films are to be 

produced, and if so, is that term a warranty? 

Where the reinsurance contract is to be

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Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

found in a slip which incorporates the 

underlying insurance, are the reinsurers 

bound by the original wording of the

underlying insurance, as found in the slip 

policy, or by the amended wording of the

underlying insurance, as found in the policy 

wording? For these purposes, is a term in the 

reinsurance contract, that the reinsured (i.e.

the original insurer) will obtain the

reinsurers' agreement to all amendments to 

the original insurance, a warranty? Are the

reinsurers bound by the policy wording 

whether or not they were aware of it or 

agreed to it? Does it matter for these

purposes whether a particular term in the

policy wording can be described as an 

unusual term? Where does the question of 

the fairness of the incorporation of an 

unusual term meet with the question of a fair 

presentation in the insurance context? 

Where the underlying insurance contract 

contains a special term which prevents the 

original insurer from relying on a defence of 

non-disclosure or misrepresentation, how 

does that affect the reinsurers? Can such a 

term be incorporated in the reinsurance

contract? If so, what is its effect there: to 

prevent the reinsurers from complaining, for 

follow the settlement purposes, about the 

payment of a claim despite non-disclosure or 

misrepresentation in the placement of the 

original insurance? Or to operate separately

as between reinsurers and reinsured at the

level of the reinsurance contract? And how 

in any event is that special term to be 

construed? Does it prevent reliance on 

misrepresentation or non-disclosure even 

where there has been negligence? Does it 

even extend to excuse any complaint and

waive any defence whatsoever?

The structure of the transaction

12. I have already introduced HIH as the 

insurer and Axa, New Hampshire and 

Independent as among the reinsurers of the 

finance investment in the two slates of films. 

The other reinsurers are not involved in this

litigation. The assured in both cases is Law

Debenture Trust Corporation (Channel 

Islands) Ltd. ("LDT", or "the assured"), who

as trustee under trust deeds in respect of the 

instruments which generated and evidenced 

the finance in question is the ultimate

representative of the investors concerned.

13. The chain between LDT and the actual 

producers of the films is a complex one. Its 

details may not matter, but, briefly, the 

position appears to be as follows. As I have

stated, one slate of films, the 7.23 slate, was 

to be produced by 7.23 Productions and the 

other slate of films ("the Rojak slate") was 

to be produced by Rojak Inc. ("Rojak"). 

Each of those production companies 

obtained its finance from a Jersey company 

called Flashpoint Ltd. ("Flashpoint"), to 

which I have already referred above in 

connection with the collateral agreement 

between it and HIH. The finance was 

provided under co-production/finance 

agreements. Flashpoint appears to have 

performed a somewhat polymorphous role, 

about which I shall say something further 

below. As a provider of finance it was only 

in an intermediate position, for it obtained 

its finance in turn from two funding vehicles 

called Hollywood Funding Ltd. (in the case 

of the 7.23 slate) and Hollywood Funding 

(No. 2) Ltd. (in the *167 case of the Rojak

slate): I shall call those companies HFL, for

I have no need to distinguish between them. 

HFL in turn represented the various

investors, who were presumably 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

shareholders. The relationship between HLF 

and Flashpoint was governed in the case of 

each slate by a purchase agreement, under 

which in return for finance Flashpoint 

undertook to pay over the revenues of the 

films up to a cap.

14. Part of the collateral security required 

by the investors whose corporate vehicle 

was HFL was the pecuniary loss indemnity 

insurance in question. Under each of the 

purchase agreements payment by HFL to 

Flashpoint of the finance was subject to the 

condition precedent of the procurement by 

Flashpoint of a "policy" underwritten by 

HIH in favour of LDT as assured: the 

"policy" was scheduled to the purchase 

agreement in question.

15. I have remarked above that Flashpoint 

played a polymorphous role. Vis-à-vis the 

production companies, it was a financer and 

co-producer. Vis-à-vis HFL, it was obliged 

to procure the underlying insurance in 

favour of LDT as a condition of obtaining 

finance to pass on to the production 

companies. Vis-à-vis HIH, it was both the 

effective principal of the placing broker and 

as such the source of the information 

presented to HIH for the purpose of the

underwriting process, and also a managing 

agent in relation to the working out of the 

insurance and the exploitation of the films. 

Its obligations to HIH were governed by the 

collateral agreements to which I have 

referred above, and to which I will revert 

below. Those agreements represented a form 

of collateral security, to the extent that 

Flashpoint could be relied on to meet its 

obligations, which HIH obtained in support 

of the risks undertaken by it in its 

underwriting of the insurances concerned.

16. The placing broker used by Flashpoint 

was Lloyd Thompson Ltd. ("Lloyd 

Thompson"). They made the presentations 

both to HIH and to the reinsurers. The 

placing was essentially a single operation, 

but, in the case of the reinsurance, it may be 

said that Lloyd Thompson was acting on 

behalf of HIH. That is how the matter is

pleaded by Axa and Independent, and thus 

must be assumed to be so for present 

purposes.

The insurances and their placement 

17. There are two sets of three documents 

whose construction is in issue in these 

appeals. For present purposes it will be

sufficient to consider one set (that in

connection with 7.23 slate) alone. The three 

documents are (a) an insurance slip, headed

"Slip Policy"; (b) a reinsurance slip headed 

"Quota Share Reinsurance Slip Policy"; and

(c) a policy document headed "Pecuniary 

Loss Indemnity Pol- icy". There is a dispute 

about the status of the third document: does 

it entirely supersede the insurance slip, or is

it to be read together with the insurance slip? 

Because the insurance slip is itself called a 

policy ("slip policy"), I will for convenience

call the third document the "policy 

wording". I do so entirely without prejudice 

to the issue which I have just indicated: it 

may be that the policy wording is not only a 

policy in its own right, but the only policy

where the underlying insurance is to be 

found. However I use the expression "policy 

wording" not only for convenience of 

exposition, but also because the slip policy 

contemplates the creation of such wording in 

its provision - "CONDITIONS: As per 

Pecuniary Loss Indemnity wording tba [to 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

be agreed] L/U [Leading Underwriter]

only". The policy wording is in the same

form as the "policy" scheduled to the 

purchase agreements.

18. Thus I will refer to the three insurance 

documents as the (original) slip policy, the

reinsurance slip policy, and the policy 

wording respectively.

19. HIH underwrote 100 per cent. of both 

original insurances. It did so subject to 

reinsurance for 80 per cent. which was

achieved. Thus it was not willing to insure 

unless it obtained reinsurance for 80 per 

cent. of its risk. It is submitted by HIH that 

because the investors wanted a policy with

one insurer, the insurance was structured as

100 per cent. insurance by HIH who 

"fronted" for the other companies who 

participated by way of lines on the 80 per 

cent. quota share reinsurance. The "fronting" 

analogy is disputed by the reinsurers.

20. A word about chronology is apposite. 

The first of the three insurance documents in 

existence as a binding contract (or 

potentially binding contract) was not the 

original slip policy, but the reinsurance slip

policy. Thus New Hampshire (by its agents 

AIG Europe (UK) Ltd. ("AIG")) put down 

its stamp subscribing to 35 per cent. of the 

reinsurance (itself "subject to r/i") on July 

22, 1997. Next to subscribe was Axa, on 

July 25, for 30 per cent. of the 80 per cent. 

Independent subscribed on July 29, for 12.5 

per cent. All three dates preceded the

original slip policy, which was not stamped 

by HIH until Aug. 13. It is not unknown for 

reinsurance to precede insurance, especially

where the former is vital to the latter.

21. The policy wording is dated Aug. 22, 

1997, which is the same date as the purchase 

agreement. The date is entered in typescript

just beneath the heading of the document. 

HIH's signature is not itself dated, but lies 

beneath the typed words "This Policy has 

been issued in London on the date stated at 

the beginning." An earlier draft of the policy 

wording had previously been endorsed on 

behalf of *168 New Hampshire and Axa on

July 30, with the words "Agreed subject to 

L/W [Line Written]. Side agreement [to be]

agreed". I assume, but it is only an 

assumption, that the "side agreement" was 

the collateral agreement which was due to 

be entered into between HIH and Flashpoint. 

Thus the original slip policy refers under 

"INFORMATION (Not to appear on the 

Policy)" inter alia to "See 'Side Agreement'

agreed by L/U only". It is to be inferred

therefore that a contemporary draft of the 

collateral agreement was in existence or

about to be brought into existence, and was

due to be shown to New Hampshire and 

Axa.

22. There is no similar version of the draft 

policy wording which was endorsed by 

Independent. Therefore Independent pleads 

that it was never shown, did not endorse, 

and was unaware of the terms of the policy

wording. For present purposes, that must be 

assumed to be true.

23. I would in general be prepared to infer 

that contemporary drafts of the original slip

policy, as well as of the collateral 

agreement, were available to be seen by the 

reinsurers. However, I cannot be sure that 

such contemporary drafts were in the same

terms as the ultimate form of those

documents; nor, in the light of the important 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

plea by Independent that it was not shown 

the draft policy wording, can I be sure that 

such drafts were seen by all the reinsurers. It 

is impossible to make findings of fact about 

such matters.

24. The collateral agreement (for the 7.23 

slate) was not in fact executed as between 

HIH and Flashpoint until at least a year 

later. The document is headed "DATED 

with effect from the 3rd August 1998". That 

heading is by way of manuscript amendment

of an original line which had read "DATED 

DECEMBER 1998". It is well possible 

therefore that the document was in fact 

executed even later than Aug. 3, 1998. 

Despite the working inference that I am in 

general prepared to make regarding the 

availability of a contemporary draft of the 

collateral agreement as of July, 1997, the 

Court was not shown such a draft in the 

available bundles, and my personal attempt 

to find one has brought to light a draft 

attached to a Lloyd Thompson fax on July 

17, 1997 (referred to there as the "Side 

Agreement") which is a very much less

sophisticated document than the final 

executed version. That again indicates that it 

is impossible to proceed on the basis of any 

particular finding as to what was seen by 

any party at the time of binding any of the 

three insurance documents.

25. So far as the placing of reinsurance and 

insurance is concerned, I will merely allude

to a small number of documents to which

the Court was itself referred at the hearing of

the appeal. I record what the documents say,

but I make no findings of fact. On June 18, 

1997 Mr. Gordon Dawson of Lloyd 

Thompson faxed Mr. Jean Michel Guillot of

Axa with "details of a new project for which 

we have been asked to place a Pecuniary 

Loss policy". The fax is headed " '7.23' 

Productions - A 6 Film Slate". The fax 

states: 

Due to the structure and source of the

financing for the slate, HIH are to front for 

100% of the risk, retaining 20% for 

themselves, and we are placing a 80% quota 

share reinsurance . . . 

The fax goes on to mention a number of 

"positive underwriting points". Among them 

are the points that one of the six films, 

"Lured Innocence", had well known stars

and had already collected some U.S.$0.75 

m. in pre-sales; that the six films would 

cross-collateralize; and that there was a sublimit to the policy of U.S.$3.9 m. any one 

film. Drafts of the "original slip" and of the 

"reinsurance slip" were attached. Those 

drafts were not in the final form of the slip

policies. The reinsurers rely inter alia on the

expression "A 6 film slate". HIH relies on 

the reference to itself as fronting for 100 per 

cent. of the risk.

26. On June 26 Independent, which 

subsequently took a 12.5 per cent. line on 

the reinsurance, scratched a 10 per cent. line 

on the underlying insurance on a slip in the 

form of the draft attached to the Lloyd

Thompson fax to which I have just referred. 

However, in the event, Independent operated 

as a reinsurer, not an original insurer.

27. On July 22, the date on which New 

Hampshire stamped the reinsurance slip

policy, Lloyd Thompson faxed AIG, New 

Hampshire's agents, with answers to certain

questions which had been posed. One

related to "Lured Innocence" which, in the 

meantime, had dropped out of the six film 

slate, apparently because of timing 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

difficulties: its film finance insurance was 

now being placed separately. The slate 

details were therefore still showing six 

films, but in the slot where "Lured 

Innocence" had been, there now appeared

the words "To be agreed". Lloyd 

Thompson's fax explained: 

The slate will still be 6 films although 

"Lured Innocence" will be placed separately.

We will find an alternative production of

similar size and with similar sales estimates 

so that the original slate is identical. 

The fax went on to state that by "force 

majeure", an expression found in the 

original slip policy, was meant a failure of

the projects to generate enough revenues at 

the expiry of the policy to equal the sum 

insured for any reason whatsoever, and

added: 

. . .This coverage is obviously subject 

always to the terms, conditions and 

limitations of the wording agreed by HIH as 

lead and fronting underwriter.

 *169 28. On Aug. 22, 1997, the date of the 

policy wording, a signed copy of it was 

provided by HIH to Lloyd Thompson under 

cover of a letter addressed by HIH to Credit 

Suisse. Lloyd Thompson sent HIH's letter 

and the policy wording on to LDT's lawyers, 

referring to it as "the Policy". The policy

wording referred to receipt of the premium 

(that was the only reference to the premium 

in it), but I do not think payment had in fact 

been made by that date.

29. Lloyd Thompson's cover note in 

respect of the original slip policy was sent 

out on Sept. 30, 1997, and its cover note in 

respect of the reinsurance slip policy was 

sent on Oct. 14, 1997. Both cover notes 

were in the final form of the respective slip

policies. The reinsurers rely on the fact that, 

even after the policy wording had been 

issued, the cover note referred to the terms 

of the original slip policy, not to the terms of 

the policy wording.

30. In the case of the Rojak slate, the 

chronology is more conventional. There the 

original slip policy was stamped by HIH on 

Dec. 4, 1997, prior to New Hampshire's 

stamping of the reinsurance slip policy on 

Dec. 5 and Axa's stamping of the same on 

Dec. 9. In this case, Independent was not a 

reinsurer. The policy wording for the Rojak

slate was dated Dec. 8, 1997, both in the 

typescript and in the signature. The 

collateral agreement was again dated with

effect from Aug. 3, 1998. The cover notes, 

both dated Dec. 19, 1997, again reproduced 

the final terms of the slip policies.

31. When in due course the insurance 

contracts came to be reproduced in Lloyd 

Thompson's books and bound up in the form 

of policy folders, they took the following 

form, at any rate as exemplified in the case 

of the Rojak slate. The original insurance 

was given a policy no. LP 9702013, which 

was the number on the slip policy stamped 

by HIH. That slip policy was bound in with 

the policy wording. The reinsurance contract 

was given the policy number LP 9702014 

and the folder contained the slip policies 

stamped by the various reinsurers.

The insurance documents

The 7.23 slate original slip policy 

32. A transcription of this shows as 

follows: 

 TYPE: Pecuniary Loss Indemnity SLIP 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

POLICY 

 INSURED: HOLLYWOOD FUNDING 

LIMITED, Jersey THE LAW 

DEBENTURE TRUST CORPORATION 

(CHANNEL ISLANDS) LIMITED 

PERIOD: 23 months with effect from

30th July 1997, DATE OF SIGNING OF 

PURCHASE AGREEMENT (YET TO BE 

CONFIRMED AND AGREED) 22nd 

AUGUST 1997 to 22nd JULY 1999 

 INTEREST: 7.23 Productions will 

produce and make six made-for-TV Films. 

 It is understood that, if at expiry of the 

Policy Period the revenue collected is less

than the Sum Insured as a result of Force 

Majeure, as defined, then the Underwriters 

will pay to the Assured, at the expiry of the 

Waiting Period, the difference between the 

Sum Insured and the revenue collected, 

subject to the exclusions set forth below. 

SUM Maximum USD 3,900,000 any one 

Film and USD INSURED: 16,400,000 in the 

aggregate. 

 SITUATION: WORLDWIDE 

 CONDITIONS: As per Pecuniary Loss 

Indemnity wording tba L/U/only. Waiting

Period: 20 Day. UK Law and Jurisdiction. . 

.Cross Collaterolisation [sic] Clause to be

agreed L/U only. 

 INFORMATION: Revenue from all films 

will cross collateralise (Not to appear [sic]

the 6 film slate. See "Side Agreement" on

the Policy) agreed by L/U only. All other 

information on file with Lloyd Thompson 

Limited. 

 PREMIUM: USD 1,640,000 inclusive of

IPT plus 7.5% of "Back End" payable semi

annually from date of first exploitation . . . 

The "TYPE" and "INSURED" lines were, as 

I understand the matter, amended on Aug. 

13, 1997 when HIH's underwriter, Mr. 

Steven Mitchell, put down HIH's stamp on 

this slip policy. The "PERIOD" line's first 

amendment was also made at that time. 

Subsequently, when the total scheme was

lined up to commence on Aug. 22, the 

period was changed again, and Mr. Mitchell 

initialled that amendment.

33. When Mr. Mitchell subscribed HIH's 

stamp, he added the following words in 

manuscript: "wording to be agreed all r/i-s" 

and "subject to reinsurance of 80%". HIH's

stamp contained the words: "All terms and 

amendments to be agreed".

34. The following matters may be observed 

at this point. The reinsurers rely (HIH did 

not) on the term found under the 

"INTEREST" line that 7.23 Productions 

"will produce and make six made-for-TV 

Films". The reinsurers submit that that was a

term, and a warranty, of both the insurance 

contract and, by incorporation, of the 

reinsurance contracts. The reinsurers also

rely, for the purpose of the issue as to 

whether this slip contract was superseded by 

the policy wording, on the designation of the 

insurance type as a "Slip Policy" and on the 

reference to the policy wording as

"wording". HIH, *170 on the other hand, 

points out that under "INFORMATION" the 

matters there indicated are "Not to appear on 

the Policy", which appears to be a reference 

to the policy wording, an advanced draft of 

which was already in existence at this time, 

and which refers to itself as a "Policy".

The 7.23 slate policy wording

 35. This was also signed by Mr. Mitchell, 

and provided inter alia as follows:

 PECUNIARY LOSS INDEMNITY 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

POLICY

 Dated 22nd August 1997 

HIH. . .being the company issuing this 

Policy (hereinafter. . .referred to as the 

"Insurer") unconditionally. . .and 

irrevocably agrees with the "Assured". . .that 

in consideration of the payment of the 

premium. . .and subject to the Insuring 

Clause, Definitions, Exclusions and 

Conditions of this Policy that the Insurer

will pay amounts due to the Assured on the 

respective due dates for payment as set out 

in this Policy. 

 PREAMBLE 

 (A) WHEREAS Flashpoint Ltd. . .has

invested or is in the process of investing in 

six revenue generating entertainment 

projects collectively known as "7.23" (the 

"Projects") where all the revenue generated

thereby. . .is due to be paid into the 

Collection Account. . .and 

 (B) WHEREAS pursuant to the Purchase 

Agreement. . .dated on or about the date of 

this Policy and made between Flashpoint 

Ltd. and Hollywood Funding Limited (the 

"Purchaser"), Flashpoint Ltd has agreed (or 

will agree) to pay to the Escrow Account. .

.the Collection Amount. . .on that last day of 

the Policy Period. . .and 

 (C) WHEREAS the Purchaser has

decided to fund its payment obligations 

under the Purchase Agreement by the issue 

of US$16,400,000 Zero Coupon Notes due 

1999. . .and 

 (D) WHEREAS Flashpoint Ltd, has 

procured the issue of this Policy in favour of 

the Assured. . .and 

(E) WHEREAS neither the Purchaser nor 

the Assured is involved nor has any interest 

in the Projects or in the Collection Account. 

 NOW THEREFORE 

 Clause 1 Insuring Clause 

 1.1 Initial Claim

If at the close of business on the last day 

of the Policy Period the amount of the 

balance standing to the credit of the Escrow 

Account is less than the Sum Insured (as 

defined in the Schedules) as a consequence 

of the occurrence of the Insured Peril then

on the last day of the Waiting Period (as 

defined in clause 2.6 below) the Insurer will 

pay to, or to the order of, the Assured such 

US Dollar amount as is necessary to ensure 

that the Assured receives and retains in the 

Escrow Account a net sum equal to the Sum 

Insured . . . 

 Clause 2 Definitions 

 2.1 Insured Peril 

 Insured Peril means the failure to generate 

a balance in the Escrow Account as at the 

last day of the Policy Period equal to the 

Sum Insured, for any reason whatsoever. 

This definition includes, but is not limited 

to, the failure of the Projects to generate a 

balance in the Collection Account equal to, 

or in excess of, the Sum Insured or the 

failure of Flashpoint Ltd. to make any 

payment under the Purchase Agreement for

any reason whatsoever . . . 

 2.3 Escrow Account 

The Escrow Account means the account 

set up with the Guernsey Branch of Credit 

Suisse First Boston (account no. 159091), in 

the name of the Assured . . . 

 Clause 4 Assignments and Amendments 

 4.1 Assignments by the Assured 

The Assured may, at any time, assign all 

or any of its rights and benefits under this 

Policy . . . 

 4.3 Amendments to the Policy 

This Policy may not be amended, 

cancelled, revoked or rescinded without the 

prior written consent of the Assured . . . 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

 Clause 7 Governing Law and Jurisdiction 

 7.1 English Law 

This Policy shall be governed by, and 

construed in accordance with, the laws of 

England and Wales. 

 7.2 English Courts 

 The Insurer and the Assured hereby 

irrevocably agree for the benefit of each 

other that the courts of England shall have 

jurisdiction to hear and determine any suit,

action or proceedings . . .

Clause 8 Disclosure and/or Waiver of 

Rights 

8.1 To the fullest extent permissible by 

applicable law, the Insurer hereby agrees

that it will not seek to or be entitled to avoid

or rescind this Policy or reject any claim 

hereunder or be entitled to seek any remedy 

or redress on the grounds of invalidity or 

unenforceability of any of its arrangements 

with Flashpoint Ltd. or any other person (or 

of any arrangements between Flashpoint 

Ltd. and the Purchaser) or non-disclosure or 

misrepresentation by any person or any 

other similar grounds. The Insurer 

irrevocably agrees not to assert and waives

any and all *171 defences and rights of setoff and/or counterclaim (including without 

limitation any such rights acquired by 

assignment or otherwise) which it may have 

against the Assured or which may be

available so as to deny payment of any 

amount due hereunder in accordance with

the express terms hereof.

36. In connection with the policy wording, 

I would underline the following matters at 

this stage. First, the reinsurers point out that

this document, although it refers to itself as 

a "Policy", has some surprising omissions if 

it was intended to be a complete and selfcontained statement of the insurance 

contract. Thus it omits any reference at all to 

the premium. It also omits the slip policy's 

reference to a cap per film or to any cross 

collateralization clause. Secondly, the 

insured peril is defined in cl. 2 in very wide 

terms as including the failure "of the 

Projects" to generate a balance in the 

collection account equal to the sum insured 

"for any reason whatsoever". Thirdly, the 

"Projects" are defined in the second 

preamble as "six revenue generating 

entertainment projects collectively known as 

'7.23' ", viz., as the reinsurers submit, the six 

film slate. The reinsurers submit that the

policy wording, even by itself, continues to 

contain a term, which they say is a warranty, 

that six films will be made. Fourthly, cl. 8 is

an important bone of contention. HIH relies 

on its as providing a complete defence to the 

original assured, LDT, on any ground (save 

for coverage itself) whatsoever, and also 

submits that, both as a matter of general 

incorporation and also because of a specific 

reference to it in the reinsurance slip policy,

it is incorporated into the reinsurance 

contracts. In effect, therefore, HIH says that 

cl. 8 left it with no defence against LDT, and 

that it similarly leaves the reinsurers with no

defence against its claim against them. The 

reinsurers say that the clause is of 

comparatively narrow width, that it does not 

cover breach of warranty or negligent 

misrepresentation or non-disclosure, and 

that in any event it is not incorporated into

their reinsurance contracts.

The 7.23 slate reinsurance slip policy 

 37. This provided as follows: 

 TYPE: As Original Policy 

 FORM: Quota Share Reinsurance Slip 

Policy. 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

 REASSURED: All companies 

underwritten for by HIH Casualty and 

General Insurance Ltd and/or Quota Share 

and/or Surplus Reinsurers if any . . . 

PERIOD: 23 months with effect from

30th July 1997. 

 INTEREST: As Original Policy. 

 ORIGINAL SUM 

 INSURED: Maximum USD 3,900,000 

any one film and USD 16,400,000 in the 

aggregate. 

 SUM REINSURED: USD 13,120,000 in 

the aggregate quota share part of USD 

16,400,000 in the aggregate . . . 

 CONDITIONS: This Reinsurance is

subject to all terms, clauses and conditions

as original and to follow that placement in 

all respects. 

This Reinsurance to bear its proportion of 

any and all costs and expenses incurred 

under the Original Insurance. 

 The Reinsured hereon agrees to consult 

and obtain Reinsurers' agreement to all 

amendments and alterations to the terms,

clauses and conditions of the Original 

Policy. The Reinsured also agrees to obtain

Reinsurers' [agreement] to the appointment 

of any advisor and/or lawyer in the event of

a claim being made under the Original 

Policy and/or a dispute under the Original 

Policy. The Reinsured further agrees to 

obtain Reinsurers' agreement to the 

appointment of accountants and/or auditors 

as deemed necessary under the Original 

Policy. In consideration of the above, 

Reinsurers hereon agree that in the event of

claim and/or professional advisors fees and

expenses being incurred under the Original 

Policy, this Reinsurance will pay at the same

time. 

 Cancellation Clause as Original Policy . . . 

PREMIUM: Original Net Premium to the 

Reassured being after all deductions 

provided for under the Original Policy . . . 

 INFORMATION: See copy of Original 

Slip and information as held on file with

Lloyd Thompson Limited.

38. The reinsurers' stamp in each case, by 

one form of words or another, provided that 

all terms and amendments were to be

agreed. It may be noted that the original 

assured and the period were still in forms 

which were to be overtaken by subsequent 

amendment. The first sentence of the third

paragraph under the "CONDITIONS" line is 

in issue: is the requirement of reinsurers'

agreement for all amendments a warranty?

The fourth paragraph is also in contention: 

what is the "Cancellation Clause" thus

incorporated from the original policy? HIH

submits that that provision is an express and 

specific incorporation of the controversial cl. 

8 of the policy wording ("Disclosure and/or 

Waiver of Rights"). The reinsurers submit, 

on the other hand, that it is either a specific 

incorporation of cl. 4.3 of the policy 

wording ("Amendments to the Policy") or

fails for lack of content. A further matter of 

note is that the "Premium" line does not say 

anything about the "Back End", but this was 

not a matter of any comment on the appeal.

*172 The Rojak slate original slip policy 

39. This was broadly similar to the 7.23 

slate original slip policy, save that in this

case the period ran for 23 months from Dec. 

8, 1997, the "INTEREST" line said that 

"Rojak Films Inc will produce and make 10 

made-for-TV Films" and the "SUM 

INSURED" line read "Maximum 

US$2,000,000 any one film and 

US$15,500,000 in the aggregate".

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(Cite as: [2001] 2 Lloyd's Rep. 161)

The Rojak slate policy wording

 40. This was in materially identical form 

to the 7.23 slate policy wording, save that 

the sum insured was $15.5 m. and the 

"Projects" here referred to the 10 Rojak

"revenue generating entertainment projects".

The Rojak slate reinsurance slip policy 

41. This was, mutatis mutandis, in 

identical terms to the final form of the 7.23 

slate reinsurance slip policy.

The collateral agreements

42. The ultimate form of the collateral 

agreement made between HIH and 

Flashpoint in connection with the 7.23 slate 

is an extensive and sophisticated document

running to some 25 pages plus schedules. 

Although the title said it was made with 

effect from Aug. 3, 1998, cl. 3(1) provided 

that its terms took effect from Aug. 22, 1997 

- the beginning of the period under the 

insurance contracts. Under cl. 2, HIH 

appointed Flashpoint as its "managing agent 

in relation to the Policy, and the risks arising

under the Policy". The word "Policies" is 

defined as referring to what I have called the 

policy wording "and 'Policy' shall be 

construed accordingly". Clause 5 contained 

undertakings by Flashpoint that the finance 

provided by HFL had been and would be 

used for no other purpose than the 

production of the "Films" ("Films" was 

defined as "those film projects listed in 

Schedule 2") and that the producer, i.e. 7.23 

Productions, had produced each film within 

budget. Clause 6 contained Flashpoint's

undertaking that it would take all necessary

steps to exploit the films to their best

commercial advantage. Clause 7 governed 

Flashpoint's responsibilities for the 

collection and holding of the film's

revenues. Clause 8 ("Representations and 

Warranties by Flashpoint") contained inter

alia the following: 

(h) it has fully and accurately disclosed to

HIH in respect of the Policy all information 

which is relevant or material to the 

consideration of the risks forming the 

Policy, or to the terms, conditions and 

exclusions contained in the Policy; . . . 

 (j) each Film within slate of Films known 

as project 7.23 has been duly and properly 

completed within budget . . . 

(k) the Film budget proportion of the 

funds placed on deposit. . .has been used in 

their entirety on the production of the Films, 

and has not been used for any other purpose.

 43. Clause 13 was a "Good Faith" clause: 

Flashpoint and HIH acknowledge that this 

Agreement and the Charge have been 

entered into for the purpose of managing the 

respective risks contained in the Policy and 

it is the parties' intention that utmost good

faith shall be the essence of the relationship

between them, and in the interpretation of 

this Agreement and in the negotiation and 

placement of the Policy.

44. Schedule 3 to the collateral agreement 

lists a number of "Principal Production 

Documents" which were to be disclosed to 

HIH before production of a film. They 

include a completion guarantee from the

Motion Picture Bond Co., and a producer's

errors and omissions insurance (if

applicable).

45. There is another collateral agreement in 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

relation to the 7.23 slate, dated in the same

way (save on this occasion said to become

effective only on its date, see cl. 2(1)), but 

this agreement is between HIH and

Flashpoint (UK) Ltd. ("Flashpoint UK"). It 

is not clear to me what the respective 

functions of the two Flashpoint companies 

or the two agreements are, but it would seem 

that Flashpoint UK, which was only 

incorporated in March, 1998, may have been 

interposed for taxation reasons. At the trial 

of the preliminary issues, Mr. Justice David 

Steel appears to have quoted from the

Flashpoint UK collateral agreement in the 

belief that it was the Flashpoint collateral 

agreement (see at par. 9). To a large extent it 

contains similar covenants, e.g. cl. 5(h) is 

the equivalent of cl. 8(h) cited above, and cl. 

10 is the equivalent of cl. 13 cited above. It 

appears that the responsibility of paying the 

"Back End" element of the premium, here 

described as the "Additional Premium", was 

the responsibility of Flashpoint UK (see cl. 

9(1)), although in its collateral agreement

Flashpoint also undertook to procure 

Flashpoint UK's performance of that 

obligation (cl. 12).

46. The reinsurers point to the collateral 

agreement as providing HIH, through 

another avenue, with the protection which 

HIH waived under cl. 8 of the policy 

wording in terms of a fair presentation of the

original risk. They submit, however, that 

that protection was available only to HIH, 

and not to themselves, in the event for

instance of any non-disclosure or 

misrepresentation in relation to the separate

contract of reinsurance. HIH submits, on the 

other hand, that Flashpoint's warranty of 

good *173 faith disclosure is available to the

reinsurers by way of subrogation, and that 

the range of protection granted by the 

collateral agreement supports its contentions 

generally as to the absence of any warranty 

in the insurance as to the making of the full 

number of the films and as to the width of 

cl. 8's exclusion of any defences to a claim 

under the insurance.

The three actions and the pleadings 

 47. There are three actions. In the first, 

1999 Folio 1248, HIH sues Independent and 

New Hampshire in respect of the 7.23 slate 

reinsurance. In the second, 2000 Folio 40, 

HIH sues Axa, again in respect of the 7.23 

slate reinsurance. In the third, 2000 Folio

268, HIH sues Axa and New Hampshire in 

respect of the Rojak slate reinsurance.

48. As a forensic point, but not as a 

pleading point, the reinsurers emphasize that 

in all three actions HIH claims by reference

to the reinsurance of its liability under the

"slip/policy" made as of the dates of HIH's

subscription to the original slip policy, and

not by reference to the policy wording.

49. In its amended defence in respect of the 

7.23 slate reinsurance, Axa pleads inter alia 

that the losses paid by HIH were not 

fortuitous and were inevitable; that Lloyd

Thompson were agents to insure acting on 

behalf of HIH; that they made

misrepresentations by reference to the fax 

dated June 18, 1997 to which I have referred 

above at par. 25 (some of which 

misrepresentations are said to have been 

made in bad faith, either by reference to 

HIH's or Lloyd Thompson's or Flashpoint's

beliefs); that HIH and Lloyd Thompson 

failed to disclose other matters, such as 

Flashpoint's right to cancel any film at any 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

time; that the 7.23 slate had been reduced 

from six films to five and that HIH therefore

had a complete defence under the original 

insurance on the ground of breach of 

warranty; that in any event HIH was in 

breach of the six film warranty in the 

reinsurance contract; and, by way of 

counterclaim, that HIH is liable to Axa 

under s. 2(1) of the Misrepresentation Act, 

1967 for the misrepresentations pleaded by 

reference to Lloyd Thompson's fax.

50. Independent, in its amended defence, 

pleads inter alia non-disclosure in relation to 

the dropping of "Lured Innocence" from the 

7.23 slate and the presence of cl. 8 in the 

policy wording ("an unusual clause of

draconian effect"); misrepresentation as to 

the presence of "Lured Innocence" in the 

slate; breach of warranty in relation to the

reduction of the slate from six films to five 

and also in relation to an alteration in the 

terms of the original insurance to the same

effect without obtaining Independent's

consent; and, by way of counterclaim, inter 

alia that HIH is liable to it under s. 2(1) of 

the Misrepresentation Act for 

misrepresentation in relation to "Lured 

Innocence".

51. New Hampshire, in its defence, 

complained inter alia that "Lured

Innocence" was not replaced by a film of 

comparable quality, and that only five films 

had been made instead of six; that HIH 

therefore either had a defence to the claim 

against it, or had, by agreeing to the 

amendment without obtaining New 

Hampshire's consent, broken the warranty 

against such amendment; but did not rely on 

any non-disclosure or misrepresentation; and 

by its amended rejoinder admitted the 

incorporation in its contract of reinsurance

of cl. 8 of the policy wording, but denied the 

effect which HIH sought to give to it.

 52. There are analogous pleadings in the 

third action relating to the Rojak slate. I

have not sought to give an exhaustive 

review of even those pleadings which are 

relevant to the preliminary issues; but this 

brief outline of the reinsurers' defences is 

enough to indicate both that they are not 

unanimous as to their situation or stance and 

that there are nevertheless certain themes in 

common. The preliminary issues which were 

ordered were an attempt to cover as much of 

this ground as possible.

The preliminary issues

53. The preliminary issues stated are as 

follows: 

1. Are the terms (of both the insurance 

contract(s) and reinsurance contract(s)) 

alleged by the Reinsurers to have been 

warranties in fact such?

2. What is the effect of Clause 8 of the 

underlying insurance contracts? In particular 

does it mean that the facts and matters

alleged in the defences (if true) would not 

have provided the Claimant 

Insured/Reinsured with a defence (whether 

in whole or in part) to the underlying 

Insured's claim?

3. On the assumption that the Reinsurers'

underwriter(s) were aware that the 

underlying policy wording contained Clause 

8, was Clause 8 a term of the reinsurance 

contract? Is the answer different if the 

underwriter(s) were not so aware?

4. What is the effect of Clause 8 in the 

context of the reinsurance contract(s)? In

particular does it mean that: 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

(i) the facts and matters alleged in the 

defences and counterclaims (if true) do not 

provide the Defendant Reinsurers with a 

(complete or partial) defence (including by 

way of set-off) to the Claimant

Insurer's/Reinsured's claim; and/or 

 *174 (ii) the Defendant Reinsurers do not

(or did not) have the right to avoid the 

reinsurance contracts on the grounds of 

misrepresentation or non-disclosure 

(assuming they otherwise have or had such a 

right) irrespective of whether or not the 

relevant misrepresentation or non-disclosure 

was negligent or fraudulent as opposed to 

innocent.

The Judge's answers

 54. Mr. Justice David Steel answered these 

questions as follows: 

 1. Of the terms alleged to be warranties: 

(1) There was a warranty in both the 

insurance and the reinsurance contract(s) as 

to the number of films to be made. 

(2) There was a warranty in the 

reinsurance contract(s) that no material 

amendments or alterations to the terms, 

clauses and conditions of the insurance 

contract would be made without the 

agreement of reinsurers. 

(3) None of the other terms were 

warranties in either the insurance or the 

reinsurance contract(s). 

2. As to the general question, see pars 30-

33 of the judgment. As to the more 

particular question, the answer is no, save in 

respect of any defences by way of or akin to 

rights of set-off or counterclaim.

3. The answer to the first question is 

"yes". The answer to the second "no". 

4. As to the general question, see pars 52-

56 of the judgment. As to the more 

particular questions, the answers are: 

 (i) No, save in respect of any defences by 

way of or akin to rights of set-off or 

counterclaim. 

(ii) Yes, save in so far as any nondisclosure or misrepresentation was 

fraudulent.

55. The answer to issue 1 speaks for itself. 

On this issue the Judge found in favour of 

the reinsurers. HIH appeals against this

determination, so far as issues 1(1) and 1(2) 

are concerned. Nothing further arises as to

issue 1(3).

56. The answer to issue 2 is opaque 

without reference to the judgment. In pars. 

30-33 of his judgment, Mr. Justice David 

Steel held that cl. 8 did not exclude a 

defence on the part of HIH as against LDT 

in respect of coverage issues (e.g. that the 

losses were not fortuitous), nor any defence 

based on breach of warranty (viz. that the 

full slate of films would be made); but that it 

did exclude a defence based on nondisclosure or misrepresentation, and 

defences by way of or akin to rights of setoff or counterclaim. HIH appeals against 

this limitation on the scope of cl. 8, save that

it no longer submits that the clause excludes 

any defence in respect of coverage issues. In 

all other respects, however, it submits on 

appeal that cl. 8 is intended to exclude all 

defences which HIH might otherwise raise 

to a claim from LDT under the original 

insurance. The scope of cl. 8 is also visited, 

in the context of the position between 

insurer and reinsurers, under issue 4.

57. As to issue 3, the Judge held that cl. 8 

was incorporated ("Yes") into the

reinsurance contract if the reinsurer in

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(Cite as: [2001] 2 Lloyd's Rep. 161)

question was aware of cl. 8, and that it made 

no difference ("No") if it was not so aware.

The reinsurers cross-appeal on this issue,

submitting that there was neither a specific

nor any general incorporation of cl. 8.

 58. Issue 4 raises two questions as to the 

effect of cl. 8 as between HIH and reinsurers 

on the hypothesis that it did fall to be 

incorporated into any reinsurance contract.

Again, the answer given cannot be 

understood without reference to the 

judgment itself. In pars. 52-56 of his 

judgment, Mr. Justice David Steel held (a) 

that the effect of cl. 8, if incorporated into a 

reinsurance contract, was not merely an 

agreement on the part of the reinsurer to

follow settlements made by HIH where 

otherwise HIH would have had a defence, 

but operated to exclude defences by the 

reinsurer as against HIH under the

reinsurance contract, on the same terms as it 

operated to exclude defences by HIH as 

against LDT under the underlying insurance. 

Thus (b), it was apt to exclude any defence 

based on misrepresentation or nondisclosure, except one involving fraud, 

whether or not the misrepresentation or nondisclosure was negligent; and (c) any

defence by way of or akin to rights of set-off 

or counterclaim; but (d) not otherwise. The 

reinsurers cross-appeal aspects (a) and (b) of 

this answer, for they submit (a) that, if

incorporated in their contracts, cl. 8 goes no 

further than agreement on their part to 

follow the settlement of HIH despite what 

might have been, in the absence of cl. 8, an 

ability to complain that such settlement 

amounted to an unjustified ex gratia 

payment; and (b) that cl. 8 in any event 

could not exclude negligent 

misrepresentation or non-disclosure.

59. I would prefer to restate the questions 

which arise on appeal and cross-appeal in 

the following way:

(i) Was it a term of the original slip policy

that six films (or in the case of the Rojak 

slate, 10 films) would be completed?

(ii) Was the six film term a term of the 

policy wording?

(iii) Did the policy wording supersede the 

original slip policy?

(iv) Was the six film term a term of the 

reinsurance slip policy?

 *175 (v) If a term of any of the insurances,

was the six film term a warranty?

(vi) Was the term in the reinsurance slip

policy that HIH agreed to consult and obtain 

reinsurers' agreement to all amendments a 

warranty?

(vii) Did cl. 8 cover and exclude breach of 

warranty defences?

(viii) Did cl. 8 cover and exclude negligent 

misrepresentation and non-disclosure?

(ix) Was cl. 8 specifically incorporated into 

the reinsurance contracts by reason of the 

term therein "Cancellation Clause as

Original Policy"?

 (x) If there was no specific incorporation of 

cl. 8, was it incorporated into the 

reinsurance contracts by reason of general 

words of incorporation?

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(xi) For these purposes, did it make any 

difference whether cl. 8 was an unusual 

term? Was it an unusual term? Was 

incorporation of such a term "fair"?

(xii) For these purposes, did it make any 

difference whether a reinsurance was aware 

of cl. 8?

(xiii) If cl. 8 was incorporated into any 

reinsurance contract, what was its effect 

there?

(i) Is the six film term a term of the original 

slip policy?

60. I do not think this was seriously 

disputed by HIH. The slip policy stated, 

against the word "INTEREST:", that "7.23

Productions will produce and make six

made-for-TV films". There was some

suggestion that this was merely a statement

of the subject-matter of the insurance, not a 

term that the six films would be made. In 

that connection, Mr. Julian Flaux, Q.C., on 

behalf of HIH, submitted that it would be

odd to find a contractual undertaking by 

LDT, the assured, as to something that

would be done by a third party. Since it was 

not in LDT's power to make the films, the 

reference should not be construed as an 

obligation.

61. However, there is nothing unusual 

about one party in what is in effect a chain 

of contracts undertaking that something will 

be done which under the overall scheme

falls to be done by another party in the 

chain. In my judgment, having regard to the 

need for the revenues of each film to crosscollateralize with the revenues of each other 

film, there can be no doubt that it is a term

of the insurance that the stipulated number

of films would be made. Clearly, there is a 

risk that, if fewer films are made, the 

possibility, that the total revenues 

engendered from those that are made may 

fall below the sum insured, increases. In an

extreme case, only one or even no film

might be produced.

62. Thus the original slip policy contained 

a term that six films would be produced and 

made.

(ii) Is the six film term a term of the policy

wording?

 63. For the purposes of this question, I will 

assume that the policy wording has to be

construed as an entirely self-contained 

contract, which has superseded the original 

slip policy: see Youell v. Bland Welch & 

Co. Ltd., [1990] 2 Lloyd's Rep. 423; [1992] 

2 Lloyd's Rep. 127.

64. Under cl. 2.1 the insured peril is 

defined, inter alia, as "the failure of the 

Projects to generate a balance. . .equal to, or 

in excess of, the Sum Insured. . ." Under cl. 

2.2 "the revenue generated by the Projects" 

is to be received into a stipulated account 

known as the collection account. The 

"Projects" is itself a term defined in

preamble (A) as "six revenue generating 

projects" in which Flashpoint has invested 

or is in the process of investing and whose 

revenues are due to be paid into the 

collection account.

65. Mr. Flaux submitted that, whatever the 

position might be under the original slip

policy, there is no term in the policy

wording requiring six films to be made. He 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

submitted that the closest that the policy

wording comes to any such term is preamble 

(A), where the language "WHEREAS, 

Flashpoint. . . has invested or is in the 

process of investing in six revenue 

generating entertainment projects. . ." is to 

be found: but that such language does not 

amount to an undertaking that Flashpoint 

will make six films. Again, he points out 

that Flashpoint is a third party, and that the

assured, LDT, is expressly said (under 

preamble (E)) to have no interest in the 

projects. Preamble (A), he submits, is 

merely a recitation of the background to the 

policy. In any event, investment in the 

projects is not the same as making the films.

 66. Like Mr. Justice David Steel below, I 

am unable to adopt this submission. He 

described the point as "finely balanced", but 

pointed out that any commercially realistic

construction of the specified insured peril 

(cl. 2) involves the premise that the projects

are to be completed in order to generate such 

income as may be forthcoming. Otherwise, 

he added - 

 . . .the policy becomes a cash performance

bond which must answer even if none of the 

films are made despite the provision of

funding (at par. 24). 

Mr. Flaux was expressly reluctant to submit

that, to test the matter by an extreme 

possibility, the policy would operate without 

any breach even where no films at all were 

made. After some time for reconsideration, 

however, he did not shrink from that 

submission.

 *176 67. For myself, I am not sure that the 

analogy with a cash performance bond is 

helpful, or even, on the abjured premise, 

accurate. I do not see why, in principle, a 

policy might not be written - if underwriters 

are willing to take the risk with or without 

such additional protection as might be 

provided by some side agreement - which 

simply insures the risk that revenues from 

the investment will be less than a stipulated 

sum. As the policy wording states, the 

failure of the projects to generate a sum

equal to the sum insured "for any reason 

whatsoever" is the essence of the peril 

insured. If the assured was the investor, it 

might be said that such a contract could not 

be made where no investment was ever 

made, for then the loss would be selfinduced. And similarly, if the assured was 

the film-maker, it might be said that such a

contract could not be effective, in the

absence of some misfortune, where no film

was ever made, for again the loss would be 

self-induced. I do not see, however, why an 

underwriter might not take the risk that, for 

instance, the investment moneys are stolen

or misused, or that the films cannot be 

completed through some misfortune such as 

ill-health. The question, however, remains 

whether this has been done under this policy 

wording.

68. In my judgment, the making of the 

films is inherent in talk of their failure to

generate revenues. "Six revenue generating 

entertainment projects" are six films, by 

another name. Unless made, they could not 

be revenue generating. It is their failure to 

generate revenue, which is at the heart of the 

risk underwritten: "the failure of the Projects 

to generate a balance. . ." means or 

necessarily implies that there will be six

films to generate a balance, whose failure to

do so in sufficient quantities will produce an

insured loss. The policy could have been 

written simply in terms of the absence of 

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funds or sufficient funds in the relevant 

account. Instead, however, an insured loss 

can only occur if the "projects" have failed 

to generate sufficient funds in the relevant 

account.

(iii) Did the policy wording supersede the

original slip policy?

69. This is a most interesting question, but 

the decision on the previous question makes

it unnecessary to determine it. Nevertheless, 

it has been fully argued.

70. The importance of the question for 

present purposes is that if the policy

wording did not supersede the original slip 

policy, then the two documents would have 

to be read together, and in such a case there 

would be no reason to regard the term of the 

original slip policy considered under 

question (i) above as having been exercised 

by anything said in the policy wording. On 

the con-trary, the original slip policy might

even have to be regarded as the primary 

document, and the policy wording as 

wording which was to be incorporated in it 

and which, where inconsistent, had to make 

way for the text of the incorporating

document. Even if, on the contrary, the 

original slip policy was the document which 

had to give way in the face of anything

inconsistent in the policy wording, there 

would be no reason why the general 

principle, that one tries to read both 

documents together, if possible, should not 

be given effect.

71. Mr. Flaux nevertheless submitted that 

authority determined that the later policy

wording superseded the earlier slip policy.

For these purposes the policy wording was 

to be regarded as the policy of which the 

contract contained in the slip was merely

anticipatory.

72. The authorities relied on by Mr. Flaux 

are as follows.

73. Youell v. Bland Welch & Co. Ltd., 

[1990] 2 Lloyd's Rep. 423 concerned a 

contract of reinsurance at Lloyd's. The slip 

was superseded by a formal policy. It was 

common ground that that was so, but the 

defendant reinsurers submitted that the slip

could be looked at as an aid to the 

construction of the policy. At first instance, 

Mr. Justice Phillips (as he then was) 

disagreed. He held that the parol evidence 

rule made the slip inadmissible. He said (at 

pp. 428-429): 

I do not consider Mr. Mance's submission 

to be sound in law. The drafting of the slip 

formed no part of the relevant matrix in this

case. That matrix was the background to the 

commercial adventure that formed the 

subject matter of the contract, not the 

mechanism by which the parties set about 

negotiating and reaching agreement. The 

reason that Mr. Mance wished me to look at 

the slip was not so that I could inform

myself of relevant background, but because 

he hoped that, by considering somewhat

different words used by the parties in an 

earlier version of the contract, I would 

deduce the agreement reached as being that 

for which he contended and construe the 

policy so as to reproduce that agreement. 

This approach to construction is one which 

has its attractions and which in some cases 

might result in the Court construing an 

unclear written agreement so as to give 

effect to the intentions of the parties where it 

might not otherwise do so. But if prior 

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written agreements or drafts were admitted

in evidence as an aid to construction the 

result would be that the Courts would often 

be called upon to consider a profusion of 

documents in cases where there was an issue 

as to the true construction of the final 

version of the contract. The English Court 

has firmly set its face against *177 such a

practice. It has done so by adopting the socalled parol evidence rule . . . 

 Mr. Sumption submitted with, I thought, 

good reason that the strict application of the 

parol evidence rule has a particular 

justification in a case such as the present. An

insurance slip customarily sets out a 

shorthand version of the contract of

insurance, in terms which may be neither 

clear [nor] complete. Where, as here, the slip

provides for the formal wording to be agreed 

by the leading underwriter, the other 

subscribers to the risk anticipate and agree 

that the leading underwriter will, on their 

behalf, agree the final wording which will 

spell out their rights and obligations. If 

differences between the wording of the slip 

and that of the formal contract which is 

embodied in the policy give rise to the 

possibility that the natural meaning of the 

slip differs from that policy, the natural 

assumption is and should be that the 

wording of the policy has been designed the 

better to reflect the agreement between the 

parties. To refer to the slip as an aid to the

construction of the policy runs counter to 

one of the objects of replacing the slip with

the policy. 

Mr. Justice Phillips went on in any event to 

adopt the construction of the policy for 

which Mr. Mance had been contending.

 74. In the Court of Appeal, [1992] 2 

Lloyd's Rep. 127, Lord Justice Staughton 

adopted a more cautious approach to the 

problem. He said (at p. 133): 

 It can be argued that an insurance slip is

different from negotiations for the formation 

of a contract. It contains a concluded 

agreement between the parties, albeit one 

which they may expect, and even agree, to

replace by different wording in a formal 

contract. The nature of the problem which 

then arises is clearly illustrated by the 

present case.

75. Lord Justice Staughton then 

demonstrated by reference to both slip and 

policy the point of construction in dispute, 

and continued (at p. 134): 

 Even if one could confidently discern 

what the words meant in the slip - which I 

do not think one can - there would remain 

the possibility, and perhaps even a 

probability, that the parties wished to alter

that meaning when they prepared and agreed

the policy. It is not argued that the leading 

underwriter had no authority to do so on 

behalf of others. 

I would accordingly hold that the slip,

whether admissible or not, is of no 

assistance in this case. 

He went on to construe the policy, and 

agreed with the reinsurers' construction.

76. Lord Justice Beldam dealt with the 

point of construction first, and only then 

sought to deal with the point of principle, 

making it plain, however, that he was doing 

so by way of comment only (at p. 140). 

Unlike Lord Justice Staughton but like Mr. 

Justice Phillips, he stated his preference for 

a rule of law, founded in the parol evidence 

rule. He pointed out that prior to the Marine

Insurance Act, 1906, a slip was regarded as 

an unenforceable contract: it was only the 

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formal policy which could be enforced. 

Thus, the slip could be looked to only if

there was an issue of rectification, 

misrepresentation or non-disclosure. He said 

(at p. 141): 

Although the slip initialled by the 

underwriters records the original agreement 

between the parties, if it contains words

showing an intention that the terms will 

subsequently be incorporated into a policy 

form, when the policy has been issued it is

the policy and not the slip which constitutes

the contract or agreement between the 

parties. Reinsurers who invited the learned 

Judge to have regard to the wording of the 

slip as an aid to the interpretation of the 

contract did not seek rectification. The slip 

is clearly admissible in evidence for some

purposes. Section 89 of the Marine 

Insurance Act, 1906 provides that reference 

may be made "as heretofor" to the slip or 

covering note in any legal proceeding. 

Prior to 1996 the extent of the slip's

admissibility after a policy had been signed 

was considered in Ionides v. The Pacific 

Fire & Marine Insurance Co., (1871) L.R. 6 

Q.B. 674. Lord Blackburn at page 685 

indicated that, although the slip was clearly 

a contract of marine insurance, it was not a 

policy and not enforceable at law but it 

could be given in evidence wherever it was, 

though not valid, material . . . 

This view was affirmed in the Exchequer 

Chamber (1873) L.R. 7 Q.B. 517. Kelly 

C.B. stated that the slip was admissible, for 

example to show that the policy had been 

procured by misrepresentation or by nondisclosure, and he added: 

It is quite enough therefore to say 

that here it was not given in evidence to 

prove a binding contract between the parties 

or to contradict or explain, or in any way 

affect the construction of the policy in

question; but it was given in evidence only 

to shew what their intention was in 

preparing the policy. 

The implication seems clearly to be that it 

would not have been admissible to affect the 

construction of the policy. 

If prior to the passing of the Marine 

Insurance Act, 1906, the slip was not 

admissible to explain or in any way affect 

the construction of the policy. . .in my

judgment it was not admissible *178 for the 

purpose of affecting the construction of the

policy in question in this case. 

Lord Justice Fox merely agreed that the

appeal should be dismissed for the reasons 

given by Lord Justice Staughton and Lord 

Justice Beldam (at p. 141). So nothing said 

by this Court in that case about the problem 

of a slip followed by a policy is binding 

authority.

77. This question was also considered by 

Mr. Justice Hobhouse (as he then was) in 

Punjab National Bank v. de Boinville, 

[1992] 1 Lloyd's Rep. 7. That case was 

decided after the judgment of Mr. Justice 

Phillips, but before the hearing in the Court 

of Appeal, in Youell v. Bland Welch. Mr. 

Justice Hobhouse could be read as stating 

that there is a rule of law that "once a policy 

has been issued that is the document that

contains the terms of the contract" (at p. 12). 

He cited Mr. Justice Phillips with approval.

Nevertheless, it has to be borne in mind that 

in his case, as in Youell v. Bland Welch , the 

parties were agreed that the policy had 

replaced the slip. He said (at p. 13): 

But in the present case there is no claim 

for rectification and no allegation of

mistake. Accordingly, in my judgment, it is 

not proper to look at the slip or another 

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anterior document. If they disclose a 

different contractual intention to that which

is contained in the policy itself, they are 

irrelevant unless there is also a claim for

rectification. The parties' contentions must 

stand or fall by the terms of the policy 

document itself - subject always to taking 

into account documents which are referred 

to in or incorporated into the policy, and the 

general principle of construing any 

document taking into account the 

surrounding circumstances. 

After citing from Mr. Justice Phillips'

judgment he said: 

Mr. Justice Phillips here stresses the 

business considerations which underlay the

replacement of the slip with a policy and the

need to treat the policy as the definitive 

document. I would only add that once it is 

accepted the policy is a contractual 

statement of the contract between the parties

and its terms, then as a matter of principle 

nothing short of rectification can permit the

Court to treat any other document or 

communication as evidence of the 

agreement (or intention) of the parties in

contradiction or variation of their agreement 

(or intention) as defined in the policy

documents on its true construction. 

The point was no longer a live one in the 

Court of Appeal, [1992] 1 Lloyd's Rep. 7;

[1992] 1 W.L.R. 1138.

78. In St. Paul Fire & Marine Insurance 

Co. (UK) Ltd. v. McConnell Dowell 

Constructors Ltd., [1993] 2 Lloyd's Rep. 503 

at pp. 516-517 Mr. Justice Potter applies the 

parol evidence rule again in refusing to look

outside the policy for the terms of the risk

insured. He said: 

However, in this case, a formal policy had 

been issued before the loss and/or claims of 

the defendants arose pursuant to the contract 

of insurance. It is therefore to the terms of 

the policy that one must look in order to 

ascertain the terms of the risk insured. .

.Nor, as is frequently the case in such 

policies, was there any reference to the slip,

the submission, or other preliminary 

documents by way of further definition or 

incorporation. . .[I]n the absence of any 

route open to Mr. Pickering to avoid the 

effects of the parol evidence rule (such as 

resort to an ambiguity in the policy or

assertion of a claim for rectification) this 

aspect of his argument must fail . . . 

Again, the point was no longer alive in the 

Court of Appeal, [1995] 2 Lloyd's Rep. 116.

79. Finally, in New Hampshire Insurance 

Co. v. MGN Ltd., [1997] 1 L.R.L.R. 24 at 

pp. 53-54 Lord Justice Staughton (giving the 

judgment of the Court) said this: 

Secondly, it was submitted that, once a

policy has been issued, its terms are 

conclusive evidence of the contract between 

the parties unless and until it is altered by 

the process of rectification. That can happen 

by agreement of the parties or by order of a 

Court but not otherwise. And there has been 

no application for rectification in this case. 

 This doctrine is said to be supported by 

Youell v. Bland Welch & Co. Ltd. (No. 1), 

[1990] 2 Lloyd's Rep. 423 and Punjab 

National Bank v. de Boinville, [1992] 1 

Lloyd's Rep. 7. But in our opinion those 

cases are concerned with the situation where 

a policy has been agreed to by the parties. In

those circumstances the policy will, at any 

rate in the ordinary way, be conclusive 

evidence of the contract unless and until it 

has been rectified; the slip cannot be used to 

add to, explain or contradict the meaning of 

the policy. That is not this case. Here the

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issue is whether the policy ever was agreed

to. The insurers cannot pre-empt the answer 

to that question by the unilateral act of

issuing it. That was the reasoning of Mr. 

Justice Potter, and we agree with it.

80. That was again an obiter passage in as 

much as it referred to the earlier cases; and it 

was again cautious to avoid restating an out

and out rule of law.

81. In my judgment, there is nothing in 

these citations which binds this Court to rule

that where a prior contract has been 

followed by a further contract, or where in 

an insurance context a slip contract has been

followed by a policy, there is a *179 rule of 

law which makes it inadmissible to consider

the terms of the prior contract, or that the

parol evidence rule has the same effect. That 

is because all passages in prior cases in this

Court are only obiter dicta. Moreover, in 

Youell v. Bland Welch and Punjab National 

Bank v. de Boinville it was common ground 

that the policies in question were intended to 

supersede the slips. Where it is common 

ground that one contract has been intended 

to supersede an earlier contract, it must 

follow that the parties' contract must be 

found exclusively in the later contract. Thus 

the earlier contract cannot be used to add to,

or modify, the later contract.

82. But does it follow that the earlier 

contract cannot even be looked at for the 

purposes of construing the later contract?

83. In principle, it would seem to me that it 

is always admissible to look at prior 

contracts as part of the matrix or

surrounding circumstances of a later 

contract. I do not see how the parol evidence 

rule can exclude prior contracts, as distinct 

from mere negotiations. The difficulty of 

course is that, where the later contract is

intended to supersedethe prior contract, it 

may in the generality of cases simply be 

useless to try to construe the later contract 

by reference to the earlier one. Ex hypothesi, 

the later contract replaces the earlier one and

it is likely to be impossible to say that the 

parties have not wished to alter the terms of 

their earlier bargain. The earlier contract is

unlikely therefore to be of much, if any, 

assistance. Where the later contract is

identical, its construction can stand on its 

own feet, and in any event its construction 

should be undertaken primarily by reference 

to its own overall terms. Where the later 

contract differs from the earlier contract,

prima facie the difference is a deliberate 

decision to depart from the earlier wording, 

which again provides no assistance. 

Therefore a cautious and sceptical approach 

to finding any assistance in the earlier

contract seems to me to be a sound 

principle. What I doubt, however, is that 

such a principle can be elevated into a 

conclusive rule of law.

 84. Where, however, it is not even common 

ground that the later contract is intended to 

supersede the earlier contract, I do not see 

how it can ever be permissible to exclude 

reference to the earlier contract. I do not see 

how the relationship of the two contracts can 

be decided without considering both of 

them. In essence there are, it seems to me, 

three possibilities. Either the later contract is 

intended to supersede the earlier, in which 

case the above principles apply. Or, the later 

contract is intended to live together with the

earlier contract, to the extent that that is

possible, but where that is not possible it 

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may well be proper to regard the later

contract as superseding the earlier. Or the

later contract is intended to be incorporated

into the earlier contract, in which case it is

prima facie the second contract which may 

have to give way to the first in the event of

inconsistency. I doubt that it is in any event 

possible to be dogmatic about these matters.

85. Is the insurance context different? Is 

the case of a slip followed by a policy a 

special case? First, it may be said that where 

a slip is followed by a policy there will 

usually be an intention to supersede the slip 

by the policy. That was the situation which 

was common ground in Youell v. Bland 

Welchetc. Secondly, the considerations 

mentioned by Mr. Justice Phillips, such as 

the fact that slips customarily set out the 

contract in shorthand in a way that is neither

clear nor complete, will in general promote 

and underline the inutility of seeking to find 

in the slip an aid to the construction of the 

policy. Beyond that, however, I am doubtful

that it is at all helpful to go.

86. In particular it is I think dangerous to 

seek help from the older cases. As late as

1867 it was the view of Judges who were 

summoned to give their opinions to the 

House of Lords in Xenos v. Wickham,

(1867) L.R. 2 H.L. 296 that a slip was a 

mere proposal for insurance: see Mr. Justice 

Smith at p. 305, Mr. Justice Willes at pp. 

314-315 and 317. Lord Chelmsford, L.C. at 

p. 321 said: 

 It is one thing to cancel a slip, which is

merely the inception of a contract, and to

change the terms of the proposal for an 

insurance; and an entirely different thing to 

release the underwriters from their liability 

upon a policy.

 87. In Ionides v. Pacific Fire & Marine, 

(1871) L.R. 6 Q.B. 674; (1872) L.R. 7 Q.B. 

517, which Lord Justice Beldam relied on in 

his judgment in Youell v. Bland Welch, Mr. 

Justice Blackburn at pp. 684-685 explained 

that a slip was a contract ("the complete and 

final contract between the parties"), but one 

unenforceable at law and binding only in

honour. He went on to explain the changing 

historical and statutory background to the 

roles of slip and policy in the context of 

marine insurance. At one time, a slip could

not be given in evidence for any purpose 

whatsoever. But that had been changed only 

a few years before, by the Customs and 

Inland Revenue Act, 1867. That provided 

that no contract of marine insurance could 

be valid unless expressed in a policy, and 

that no policy could be given in evidence 

unless duly stamped. A slip therefore 

remained unenforceable: since, however, a 

slip was not a policy, "it may be given in 

evidence wherever it is, though not valid, 

material". The rule which in marine

insurance required a "policy" in due course 

became embodied in s. 22 of the Marine 

Insurance Act, 1906. It was only under the 

Finance Act, 1959 that such a policy became

valid even though not stamped. For a *180

history of the matter see Arnould's Law of 

Marine Insurance, 1981, 16th ed., at pars. 

14-20.

 88. In Ionides v. Pacific Fire & Marine a 

problem arose because the policy named the 

vessel in which the insured cargo was to be

carried as Socrates, whereas the vessel in

which the cargo had actually been shipped, 

and lost, was Socrate. The question was 

whether the slip could be used to assist in

finding the parties' true intention. Because of 

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the statutory restrictions, and the 

controversy surrounding use of the slip for 

any purpose, both Courts whose judgments 

were reported were anxious to show that the 

use for which the slip was admitted into

evidence was limited. In the Court of

Queen's Bench, Mr. Justice Blackburn 

looked on the matter as a mere case of

misnomer. It seems to have gone beyond 

that, however, for the jury's finding was that 

"neither party cared what the name of the 

ship was, as they meant to insure the goods 

by the ship on which they were really

shipped" (at p. 686). In the Exchequer 

Chamber, Kelly, C.B. defined the issue in 

these terms (at pp. 525-526): 

In this case it is unnecessary to do more 

than to consider whether [the slip] is

admissible in evidence for the purpose of 

shewing what the two parties intended at the

time they entered into this transaction; in

other words, whether they intended it to be a 

policy pursuant to a previous contract, 

although that contract was not binding, or 

whether the policy was a new, separate, and 

substantive contract, to be construed without 

reference to the previous acts of the parties. 

It was the former solution which was 

adopted. It might well be said, therefore, that 

the case is not an authority for a rule of law 

which would prevent a slip being admitted 

to assist in the interpretation of the policy.

89. In Thompson v. Adams, (1889) 23 

Q.B.D. 361 the effect of a slip outside the

marine insurance context was still in issue. 

There the underwriters under a fire 

insurance at Lloyd's submitted that the slip

was no contract, merely an honorary 

undertaking to make a contract 

(subsequently, in the policy): see at p. 364. 

Evidence as to the custom of the market was

called, but Mr. Justice Mathew was not 

deterred from his view "by the light of 

common sense" that the slip was "a binding 

contract to insure", whatever might be the

position in the case of marine insurance (at 

p. 365). Even so, the theory of Mr. Justice 

Mathew seems to have been that the slip was

merely a contract to issue a policy and that

upon issue the contract of insurance would 

be in the policy.

90. In 1974, in the context of aviation 

insurance Lord Diplock put the matter in the

following way, in American Airlines Inc. v. 

Hope, [1974] 2 Lloyd's Rep. 301 at pp. 304-

305: 

 The slip contemplates its eventual 

replacement by a policy of insurance in the

standard form in use at Lloyd's for aviation 

risks, but subject to such deletions and 

additions as are indicated in the slip. Such 

additions are generally clauses which 

themselves follow a standard form and are 

sufficiently identified in the slip by a

reference to a description or a number but 

some may be specially tailored to the

particular requirements of the assured. In the 

latter case if the slip is for an original 

insurance the actual clause is set out in the

slip itself, although it may be in only 

abbreviated form . . . 

 Almost invariably the slip provides that

the wording of the policy is to be agreed by

leading underwriter. Where this is the case 

the leading underwriter may occasionally 

consent to some clause going into the policy 

which was not provided for by the slip, if in 

his judgment it would not affect the 

premium. So there is the possibility of minor 

variations being made in the contract of 

insurance when the terms of the policy are

agreed.

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91. The point was well made in argument 

that in many cases a loss may occur before a 

policy is even issued. That was precisely the 

point which drove Mr. Justice Mathew as a 

matter of common sense to conclude that 

there must be a binding contract in the slip. 

If thereafter a policy is issued which is

intended to supersede the slip, the principle

that the contract is to be found in the policy 

rather than the slip remains; but the example 

demonstrates the difficulty of a dogmatic 

assertion that in no case can the construction

of the policy be educated by a consideration 

of the slip, when ex hypothesi the slip was 

the only contract in existence at the time of 

loss.

 92. In the light of the uncertain status of the 

slip until relatively speaking modern times, I 

would for myself with genuine respect 

consider it dangerous to build, as Lord 

Justice Beldam did in his obiter dicta in 

Youell v. Bland Welch, on the single case of 

Ionides v. Pacific Fire & Marine , or on the 

negative inference or "implication", which 

he sought to derive from the positive use of 

the slip there "to shew what their intention

was in preparing the policy", that a slip

could never be used to assist in the 

construction of a policy. I would, however, 

agree that in the absence of a plea of 

rectification a slip could not be used to alter

or contradict the construction of a policy 

which had superseded a slip. As it happens, 

there does not appear to be any support in 

Ionides v. Pacific Fire & Marine for the 

thesis that policy supersedes slip, albeit that 

is perhaps entirely to be explained by the 

peculiarities of marine insurance at that 

time. A policy could hardly be said to 

supersede an unenforceable contract.

Matters have now moved on. This 

illustrates, *181 however, the problems

involved in seeking a rule of law amid the 

shifts of historical development.

93. Even Mr. Flaux came to put his 

submission in favour of the supersession of 

slip by policy as a matter of a rebuttable 

presumption of fact. Having begun by 

favouring a rule of law, he no longer did so 

by the end of his submissions. However, I 

am doubtful about his presumption of fact. I 

would prefer to say that it is a question of 

construction which depends in part, as all 

such questions do, on the surrounding 

circumstances. In the insurance market, 

however, it may well by now be possible to 

talk of a general presumption that a policy is 

intended to supersede a slip.

 94. In the present case, however, it is not 

common ground that the policy wording 

superseded the original slip policy. On the 

contrary the issue is precisely whether the

policy wording was intended to supersede 

the original slip policy. As part of that issue

it is also debated whether the policy wording

is a self-contained policy and whether it 

matters whether the slip policy is called a 

slip or a slip policy.

95. It is unnecessary to decide this issue of 

whether the slip policy was superseded by 

the policy wording, but I do not think it was. 

First, the slip was called a "slip policy". That 

immediately calls into question the basic 

presumption that a slip is intended to be 

superseded by a policy. Secondly, it is hard 

to see how the policy wording, for all that it 

is presented as a self-contained "policy", 

was intended to supersede the slip policy.

Thus there is nothing in the policy wording 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

concerning a cap of U.S.$3.9 m. any one 

film, nor cross-collateralization, but above 

all there was nothing regarding the premium 

(other than it had been paid). It is I suppose 

possible that by Aug. 22, 1997 the basic 

premium had been paid, although I do not 

think that it had; but there still remains the

"Back End" or additional premium, and 

nothing at all has suggested that there was 

any intention on the part of HIH to forego 

that right. It would appear therefore that the 

policy wording is incomplete, and that it 

would be preferable to regard the policy 

wording as containing the "Conditions" to 

be incorporated into the slip policy. (That 

would be consistent with the manner in 

which the slip policy and the policy wording 

were bound up together in Lloyd 

Thompson's policy folders, and with the 

terms of Lloyd Thompson's cover notes: 

although I do not rely on such matters.) It 

would also be consistent with the terms of 

the reinsurance slip policy, a contract which

may have been amended as the underlying 

insurance became amended, but which was 

never superseded by any further contract or 

policy. The reinsurance slip policy stated 

that the "INTEREST" was "As Original

Policy", which was a reference to the

original slip policy's "7.23 Produc tions will 

produce and make six made-for-TV Films", 

and contained express references to the 

U.S.$3.9 m. cap any one film and to the 

premium as being "Original Net Premium. . 

."

96. It was also the Judge's view that there 

was no intention to supersede the original

slip policy.

97. I am inclined therefore to conclude that 

the original slip policy was never

superseded. It follows to my mind that the 

policy wording itself can be, and ought to 

be, construed against the background of the 

original slip policy. That produces the result 

both that there is no reason to think that the

term "7.23 Productions will produce and 

make six made-for-TV Films" ever ceased 

to be a term of the insurance, and that in any

event the policy wording's construction 

(question (ii) above) is further strengthened 

by reference to the wording of the original 

slip policy.

(iv) Is the six film term a term of the 

reinsurance slip policy?

98. In the circumstances this question can 

only be answered "Yes".

(v) Is the six film term a warranty? 

99. Mr. Justice David Steel held that the 

six film term was a warranty whether found 

in the original or the reinsurance contract.

Mr. Flaux challenged that conclusion. He 

submitted that for a term in an insurance

contract to be a warranty, the intention that

it should be so had to be very clear, since the 

implications of breach were so serious.

Where the fulfilment of a term depended on 

a third person, here the makers and 

producers of the films, and the assured had 

no control over events, there should be all 

the more caution in finding a warranty. As 

for the original slip policy, one should not 

expect to find a warranty in the definition of

the insured interest; and as for the policy

wording, the oblique reference to the 

projects could not support a warranty. Nor 

should the assured's own brokers, Lloyd 

Thompson, be thought of as putting forward 

a warranty.

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100. Under this issue I am considering the 

matter outside the terms of cl. 8 of the policy 

wording. HIH relies on cl. 8 as a waiver of 

every defence save for that of lack of cover. 

Mr. Flaux also submits, however, that the 

presence of cl. 8 makes it harder to find a

warranty in the contract. However, I do not 

understand that submission. If cl. 8, which I 

shall consider below, prevents reliance on a 

defence of breach of warranty, then so be it: 

but I do not see how it affects the nature of a 

term. On the contrary, even if cl. 8 is given 

the wide effect on which HIH relies, that 

merely suggests that there are terms in the 

contract whose breach would *182 amount, 

absent cl. 8 itself, to a complete defence to a 

claim.

101. In my judgment, once the six film 

term is established as a term of the insurance

or reinsurance contract, the grounds for 

holding it to be a warranty are very strong. It 

is a question of construction, and the 

presence or absence of the word "warranty" 

or "warranted" is not conclusive. One test is 

whether it is a term which goes to the root of 

the transaction; a second, whether it is 

descriptive of or bears materially on the risk

of loss; a third, whether damages would be 

an unsatisfactory or inadequate remedy. As 

Lord Justice Bowen said in Barnard v. 

Faber, [1893] 1 Q.B. 340 at p. 344: "A term

as regards the risk must be a condition." 

Otherwise the insurer is merely left to a 

cross-claim in a matter which goes to the 

risk itself, which is unbusinesslike (ibid.; see 

also Ellinger & Co. v. Mutual Life Insurance 

Co. of New York, [1905] 1 K.B. 31 at p. 

38). In the present case. the six film term 

would seem to answer all three tests. It is a

fundamental term, for even if only one film 

were omitted, the revenues are likely to be

immediately reduced. That will not matter if

the revenues already exceed the sum 

insured, for in that case there can be no loss

in any event. Where, however, the revenues 

fall below the sum insured, the loss of a 

single film may be the critical difference 

between a loss or no loss, and will in any 

event be likely to increase the loss. For the

same reason the term bears materially on the 

risk. A cross-claim would be an 

unsatisfactory and inadequate remedy 

because it would never be possible to know 

how much the lost film would have 

contributed to revenues. The very fact that 

the making of the six films lies under the

"INTEREST" line emphasizes the 

importance of the term and its direct bearing 

on the risk. As for the draft originating with 

the assured's brokers, that is nearly always 

the case. There is a maximum of 

construction which is called the contra

proferentum rule; but there is no maxim to 

the opposite effect.

102. My conclusion that the term is a

warranty is consistent with the view

expressed in MacGillivray on Insurance 

Law, 9th ed., 1997, at par. 10-26 that - 

. . .a description of the subject-matter of

the insurance written into the policy and

obviously material to the risk would be 

likely to be construed as a warranty.

 103. Moreover, such pre-contractual 

material as the Court has been shown is 

consistent with the importance of the full 

slate of films and the way in which there

was to be cross collateralization of their

revenues. Similarly the importance of 

"Lured Innocence" in particular was 

emphasized, and when that film dropped out 

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of the 7.23 slate there was an assurance that 

it would be replaced by another film of 

comparable quality. However, for reasons 

which I have set out at the beginning of this 

judgment, I do not think it would be right to 

place any store on such matters, and I have 

not.

104. The position is the same, as it seems 

to me, whether the six film term is seen as

arising out of the original slip policy itself,

or out of the policy wording, or out of a 

combination of the two; and whether the 

term is viewed from the point of view of the 

original insurance or the reinsurance. The 

reinsurance slip policy expressly states 

"INTEREST: As Original Policy". 

Moreover, once the six film term is seen as

being a term of the insurance, whether set 

out as it is in the original slip policy or

derived from the construction of the policy 

wording, it is immediately clear that it is the 

essence of the risk underwritten: if the slate 

of (six) films is made with the moneys 

invested, the insurers will indemnify the

investors against loss. That is what the 

insurance is all about.

(vi) Is the term in the reinsurance slip

policy that HIH agreed to consult and 

obtain the reinsurers' agreement to all 

amendments a warranty?

105. The term in question is the first 

sentence of the third of the CONDITIONS

set out in the reinsurance slip policy, viz. - 

 The Reinsured hereon agrees to consult 

and obtain Reinsurers' agreement to all 

amendments and alterations to the terms,

clauses and conditions of the Original 

Policy.

106. Mr. Flaux's principal submission 

under this issue is that the last sentence of

that paragraph sets out the consequences of 

a breach of that term, namely that because 

simultaneous payment of the reinsurance is 

said to be "In consideration of the above", 

therefore a breach of the consultation and

joint agreement term means that the 

reinsurers are spared the obligation of

simultaneous payment.

107. That, however, is a non-sequitur. The 

last sentence reads: 

In consideration of the above, Reinsurers 

hereon agree that in the event of a claim 

and/or professional advisors fees and 

expenses being incurred under the Original 

Policy, this Reinsurance will pay at the same

time.

108. There is no consequence prescribed in 

the last sentence for its breach. The fact that 

simultaneous payment is the consideration 

for HIH's promises in the preceding

sentences does not mean that HIH's breach 

of those promises simply frees the reinsurers 

of their promise of simultaneous payment.

 109. Mr. Flaux also submits that the second 

and third sentences of the paragraph, dealing 

as they do with claims consultation and the 

appointment of *183 lawyers and accounts, 

are not warranties, and that indicates that the

first sentence is not a warranty either. The 

argument is valid as far as it goes, but it is 

not decisive. The fact is that the subjectmatter of the first sentence differs in a 

critical way from the subject-matter of the 

second and third sentences, in that the first 

sentence is dealing with the content of the

insurance contract itself, whereas the second 

and third sentences are dealing only with the 

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processing of claims. Moreover, the subjectmatter of the first sentence reflects the 

position at common law. Thus in Norwich 

Union FireInsurance Society v. Colonial 

Mutual Fire Insurance Co. Ltd., (1922) 12 

Ll.L.Rep. 215; [1922] 2 K.B. 461 it was

held that variation of the original policy

without the consent of the reinsurer 

discharged the latter. Mr. Justice McCardie 

referred at p. 218; pp. 468-469 to this 

Court's decision in Lower Rhine and 

Wurtemberg Insurance Association v. 

Sedgwick, [1899] 1 Q.B. 179, and to Lord 

Justice Rigby's dictum during argument (see 

the report at 4 Com. Cas. 14 at p. 19) that: 

It is one thing for the plaintiffs to trust to 

the policies which the defendant had made

and another to trust to those that he might 

make in the future. 

Mr. Justice McCardie then continued (at p.

218; p. 469): 

 . . .It appears to me that there is no halfway house between a right to alter the head 

policy without consent and an absence of

right to do so. Either it can be altered or not. 

If it can be altered, then what limit is to be

placed on the right of alteration? The only

sound rule seems to be that the head policy 

cannot be altered save with the consent of 

the re-insurer.

110. Mr. Justice McCardie then went on (at 

p. 218; pp. 469-470) to apply the analogy of 

the rule in contracts of guarantee: 

As pointed out by Leake [on Contracts, 

7th ed.] at p. 600: "The Court will not 

entertain the question of the materiality of

the variation in the contract guarantee; and 

unless it is self-evident that it is not material 

or prejudicial to the surety, he is left to be

the sole judge whether he will consent to

remain liable." This passage is supported by 

the well-known judgment of Cotton LJ in 

Holme v. Brunskill(1877) 3 QBD 495, 504. 

It seems to me that a rule at least is rigorous

should apply to matters of insurance. If a 

head policy could be altered without the 

consent of the re-insurer the latter would be 

thrown in to a position of danger, difficulty 

and doubt.

111. Mr. Justice David Steel held, and the 

reinsurers accept, that the term in question

only covers material amendments. If so, that 

may represent a position somewhat less 

stringent than the common law. It is no 

reason, however, for holding that the term is

not a warranty, to the contrary. In my

judgment, therefore, the first sentence of the

third condition stated in the reinsurance slip 

policy is a warranty.

(vii) Does cl. 8 cover and exclude breach of 

warranty defences?

112. It does not matter whether the sixfilm slate term or the amendment term is a 

warranty if cl. 8 of the policy wording 

covers and excludes breach of warranty

defences (and if the reinsurer is bound by cl. 

8).

 113. It is convenient to set out cl. 8 again:

Clause 8 Disclosure and/or Waiver of 

Rights 

8.1 To the fullest extent permissible by 

applicable law, the Insurer hereby agrees

that it will not seek to or be entitled to avoid

or rescind this Policy or reject any claim 

hereunder or be entitled to seek any remedy 

or redress on the grounds of invalidity or 

unenforceability of any of its arrangements 

with Flashpoint Ltd or any other person (or 

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of any of its arrangements between 

Flashpoint Ltd and the Purchaser) or nondisclosure or misrepresentation by any 

person or any other similar grounds. The 

Insurer irrevocably agrees not to assert and

waives any and all defences and rights of 

set-off and/or counterclaim (including 

without limitation any such rights acquired 

by assignment or otherwise) which it may 

have against the Assured or which may be 

available so as to deny payment of any 

amount due hereunder in accordance with

the express terms hereof.

114. Mr. Flaux submits that cl. 8 provides 

the insured with protection against every 

defence available to HIH, except the defence 

that the claim does not fall within the cover

itself. Mr. Justice David Steel had held 

below that if cl. 8 extended to including 

within its waiver even a coverage defence,

then that would remove from the agreement

the basic ingredients of a contract of 

insurance, a conclusion which a Court 

would be loath to reach in the absence of the 

very clearest language: cf. in a different 

context Tor Line A.B. v. Alltrans Group of 

Canada Ltd., [1984] 1 Lloyd's Rep. 123; 

[1984] 1 W.L.R. 48. Mr. Flaux does not 

pursue HIH's appeal from that conclusion. 

He accepts that a claim outside the cover of 

the insurance is simply not within the

insurance at all; and that a defence of lack of 

cover would not fit with the words at the end 

of the second sentence which presume that, 

but for the defence in question, an amount

would be "due hereunder in accordance with

the express terms hereof". With that

exception, however, Mr. Flaux submits that 

cl. 8 is a complete exoneration of every 

*184 defence, save for fraud in the making 

of the original insurance contract itself.

115. Mr. Flaux relies on both sentences of 

the clause, but primarily on the first. There

he points in particular to its concluding 

words - "or any other similar grounds". In 

the second sentence he points in particular to 

the words - "any and all defences".

116. He submits that the first sentence has 

the very widest scope. It begins with the 

words "To the fullest extent possible" and 

continues with language of broad import, 

viz. "the Insurer hereby agrees that it will 

not. . .reject any claim hereunder. . .on the 

grounds of. . .non-disclosure or 

misrepresentation by any person or any 

other similar grounds". He submits that a 

defence of breach of warranty is closely akin

to that of non-disclosure or 

misrepresentation in that in both cases the

contract can be avoided. In that connection 

he relies on some remarks of mine in 

Svenska Handelsbanken v. Sun Alliance and 

London Insurance plc, [1996] 1 Lloyd's Rep. 

519 at p. 552.

117. As to the second sentence, he submits

that a defence of breach of warranty is

within the words "any and all defences. . 

.which it may have against the Assured or 

which may be available so as to deny 

payment of any amount due hereunder. . ." 

He submits that if Mr. Justice David Steel 

were right to say that the word "defences" 

were limited to defences "akin to rights of 

set-off or counterclaim", then the word 

would be redundant, for the second sentence 

immediately goes on to refer expressly to 

rights of set-off or counterclaim. Thus the 

words "defences and rights of set-off and 

counterclaim" are not to be understood as 

part of a single phrase. There are, he says,

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no "defences" of counterclaim, thus the term

"defences" is dealing with something apart 

from "rights of set-off or counterclaim".

118. In my judgment, however, Mr. Justice 

David Steel was right to reject the 

submission that cl. 8 contained a defence to 

breaches of warranty. Subject to its

concluding words "or any other similar 

grounds", the first sentence's subject matter 

is (a) "the invalidity or unenforceability of 

any of [the Insurer's] arrangements with 

Flashpoint Ltd" etc., and (b) "non-disclosure 

or misrepresentation". Both those items of 

subject matter are extra contractual. The first 

is dealing with arrangements collateral to the 

insurance contract, the second is dealing

with pre-contractual negotiations. Breaches

of warranty, however, are breaches of the 

contract of insurance itself. I would not 

therefore regard them as constituting

"similar grounds". Mr. Flaux argues 

similarity by reference only to the remedy, 

invoking the comments in Svenska v. Sun 

Alliance. There, however, I was concerned

to underline the importance of a clause, 

which I found to be a warranty, by reference 

to its concern for proper disclosure, and I 

emphasized that both non-disclosure and 

breach of warranty could have the effect,

albeit in their different ways, of "undoing 

the insurance. . .not something that merely 

sounds in damages". That was in the context 

of a submission that the clause in question

was not a warranty but merely sounded in 

damages. In the present case, however, the 

critical phrase is concerned with similarity

of grounds, not with dissimilar grounds 

which might give rise to similarities of 

remedy.

119. As for the opening phrase ("To the 

fullest extent permissible by applicable

law"), those words cannot be relied on to 

extend the scope of the first sentence, even if

they may be said to emphasize its width and 

to warn against any attempt at an artificial 

narrowing of its scope. Essentially, however, 

they are words of saving, not of extension.

120. As for the second sentence, if it had 

been intended to include a waiver of breach

of warranty, that could have been easily 

stated. As it is, the whole pressure of Mr. 

Flaux's submission has to be carried

ultimately by the single word "defences",

which it is said stands separately from the 

rest of the sentence. In my judgment, 

however, it is much more natural to read that

word as part of the overall phrase "defences

and rights of set-off and/or counterclaim". It 

is natural to think of a set-off as a defence 

(even if it can also be thought of as a right), 

and a counterclaim as a right (even if it may 

also give rise to a defence). In my view the 

word "defences" is primarily connected with 

"set-off" and the word "rights" is primarily 

connected with "counterclaim". In any 

event, it is plain that a set-off may give a 

defence, and that is sufficient to explain the 

language of the sentence.

121. Moreover, that explanation would be 

consistent with the closing language of the 

sentence - "so as to deny payment of any 

amount due hereunder in accordance with

the express terms hereof". If there was prima 

facie a good claim ("amount due hereunder" 

etc.), a defence of set-off or a right of 

counterclaim might result in a valid denial 

of payment of a sum otherwise due. Where, 

however, a breach of warranty occurs before 

a loss within the cover, it is difficult to say

that that breach provides a defence against 

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an amount "due hereunder in accordance 

with the express terms hereof". It would be 

more natural to say that by reason of the

breach of warranty there was nothing due, 

and that that was so precisely because of the 

contract's "express terms".

122. That is because it is well established

that a breach of warranty produces an 

automatic discharge of a contract of 

insurance from the moment of breach: Bank 

of Nova Scotia v. Hellenic Mutual War

Risks Association (Bermuda) Ltd. (The 

Good Luck), [1991] 2 Lloyd's Rep. 191; 

[1992] 1 A.C. 233. *185 Lord Goff of 

Chieveley at p. 202, col. 1; pp. 262-263 put

the matter in this way: 

 Once this is appreciated, it becomes 

readily understandable that, if a promissory 

warranty is not complied with, the insurer is 

discharged from liability as from the date of 

the breach of warranty, for the simple reason

that fulfilment of the warranty is a condition

precedent to the liability of the insurer. This

moreover reflects the fact that the rationale

of warranties in insurance law is that the

insurer only accepts the risk provided that 

the warranty is fulfilled. This is entirely

understandable; and it follows that the 

immediate effect of a breach of a promissory 

warranty is to discharge the insurer from

liability as from the date of the breach.

 123. At p. 202, col. 2; p. 263F-G Lord Goff 

cited with approval the following statement 

by Lord Justice Kerr from State Trading

Corporation of India Ltd. v. M Golodetz 

Ltd., [1989] 2 Lloyd's Rep. 277 at p. 287, 

that - 

Thus, the correct analysis of a breach of 

warranty in an insurance contract may be 

that, upon the true construction of the 

contract, the consequence of the breach is

that the cover ceases to be applicable unless

the insurer subsequently affirms the

contract, rather than to treat the occurrence

as a breach of the contract by the insured 

which the insurer subsequently accepts as a 

wrongful repudiation.

124. This analysis of the function of a 

warranty and of the consequences of its 

breach not only supports, to my mind, the 

construction which I would give to the 

second sentence of cl. 8, but also 

undermines Mr. Flaux's construction of the 

first sentence. The latter factor is for two

reasons. First, it demonstrates that even the 

remedy for breach of warranty differs in 

important respects from the remedy for nondisclosure or misrepresentation. In the case 

of breach of warranty, there is an automatic 

discharge; in the case of non-disclosure or 

misrepresentation, nothing happens unless 

the insurer elects to avoid the contract, in

which case the contract is not discharged for 

the future but rescinded ab initio. Secondly, 

it demonstrates that by being in breach of his

warranty, an assured takes himself outside 

the cover which he has agreed with his 

insurer. As Lord Justice Kerr said - "the

cover ceases to be applicable". This is

because a warranty is very akin to a 

statement of the cover provided by the 

insurance, indeed it is part of that cover's 

definition. That is why the insurance ceases 

to bind as from the time of breach. That is 

why the insurance ceases to bind even 

though any subsequent loss had nothing to 

do with the breach of warranty. It is because 

the insurer had only agreed to cover the risk 

provided the warranty was performed. It 

follows that Mr. Flaux's concession that cl. 8 

does not provide an answer to lack of cover 

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in principle covers the case of a breach of

warranty as well. At any rate, the case of

lack of cover and the case of breach of

warranty are much closer to one another 

than either is to non-disclosure and

misrepresentation.

125. For these reasons I agree with the 

Judge that cl. 8 does not exclude a defence

based on breach of warranty.

(viii) Does cl. 8 cover and exclude negligent 

misrepresentation and non-disclosure?

126. Mr. Justice David Steel held that cl. 8 

covered and thus excluded a defence based 

on negligent misrepresentation and nondisclosure. The reinsurers cross-appeal on

this issue. Although treated below in the 

context of the reinsurance contracts (see 

pars. 52-56 of his judgment under the 

heading of "Effect of Clause 8 in the 

reinsurance contract"), this issue seems to 

me to stand free of that question of 

incorporation. If cl. 8 covers and excludes a 

defence based on negligent 

misrepresentation and non-disclosure, it will 

do so in the original insurance. Of course, 

the role of cl. 8 in the reinsurance contracts, 

if there incorporated at all, is another

question, to which I shall come later.

127. The reason why the matter was 

discussed in the Court below in the context 

of reinsurances is that preliminary issue 4(ii)

specifically raised the question as to whether 

the reinsurers could avoid their contracts of

reinsurance on the grounds of fraudulent or 

negligent, as distinct from (non-negligent) 

innocent misrepresentation or nondisclosure. I think it is more helpful to 

concentrate first on the scope of cl. 8 

according to its own terms, and secondly to

ask how such a clause would operate in the 

reinsurance contracts, if incorporated there 

at all.

128. Two preliminary matters need to be 

stated. The first relates to the question of

fraudulent misrepresentation or nondisclosure, a matter included in the

preliminary issue. Mr. Justice David Steel 

stated "there are in fact no allegations of

fraud against HIH or its agents" (at par. 52). 

That is not, however, as I read the pleadings

(see at par. 49 above), but it may be that he 

had been told that nevertheless fraud was 

not being relied upon. He went on to say ". . 

.[f]or the record" that it is not open to a party 

to exclude liability "for his own fraud" in

inducing the contract, citing S. Pearson & 

Son Ltd. v. Dublin Corporation, [1907] A.C. 

351. That was presumably intended to leave

open the question of whether one can 

exclude liability for the fraud of one's agent, 

a question which was debated *186 in the 

authority just cited, with Lord Halsbury and 

Lord Atkinson appearing to state that one 

can not (at pp. 357-358, 366-367) and Lord 

Loreburn, L.C. (at p. 354) expressing 

himself more cautiously. However, nothing 

has been said before this Court on the 

question of fraud, perhaps again because it 

was common ground that no case of fraud is 

intended or persisted in. Therefore, nothing 

said by me in this paragraph should be 

regarded as other than a passing comment. I 

note that in HIH Casualty and General 

Insurance Ltd. v. Chase Manhattan Bank, 

[2001] 1 Lloyd's Rep. 30 at par. 44 the case 

of Pearson v. Dublin Corporation is

analysed by Mr. Justice Aikens, and that he 

concludes at pars. 45-46 that it is 

conceptually possible to have a clause in a

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contract of insurance that excludes or limits

the consequences of fraudulent nondisclosure by the assured's agent.

129. The second matter relates to a cause 

of action in negligent misrepresentation, as 

distinct from the right to avoid for

(negligent) misrepresentation. The reinsurers 

submitted on their appeal that the former 

cause of action in any event was not 

excluded by cl. 8. Their pleadings invoke 

such a cause of action. Preliminary issue 

4(ii) does not, however, specifically

encompass it, since it speaks only of a right 

to avoid, and Mr. Justice David Steel does 

not appear to have considered it. However, it 

would seem to me to be wrong to leave it 

out of account.

130. In considering only the remedy of

avoidance, Mr. Justice David Steel gave the 

following reasons (at par. 56) for his

conclusion that the parties did intend to 

exclude the consequences of inadvertent 

concealment or misrepresentation whether 

careless or not: 

(i) The insurer expressly forgoes rights of 

avoidance, rejection of any claim or any 

remedy for non-disclosure or

misrepresentation. 

 (ii) The obligations of good faith are 

indeed unitary and absolute: the

establishment of a negligent misstatement 

adds nothing: the very concept of a 

negligent non-disclosure is not easy to 

grasp. 

(iii) There is no indication in the rest of

the policy wording that the parties were

minded to distinguish between deliberate, 

careless and accidental activity. 

 (iv) The introductory words "to the fullest 

extent permissible by applicable law" on 

their natural meaning accord the widest 

possible scope to the exclusion. I reject the 

submission that it means no more than: 

"Avoidance for innocent misrepresentation 

or non-disclosure is not permitted, unless the 

law prohibits such an exclusion".

131. The reinsurers submitted that Mr. 

Justice David Steel was there in error. They 

relied primarily on the well-known 

principles of construction set out in Canada 

Steamship Lines Ltd. v. The King, [1952] 1 

Lloyd's Rep. 1; [1952] A.C. 192, which they 

said the Judge was wrong not to apply nor to 

consider of particular help. He should rather 

have followed Mr. Justice Colman in 

Toomey v. Eagle Star Insurance Co. Ltd. 

(No. 2), [1995] 2 Lloyd's Rep. 88 and Mr. 

Justice Aikens in HIH v. Chase Manhattan 

Bank in applying the Canada Steamship

principles to analogous clauses in insurance 

contracts. He should therefore have 

concluded that there was no sufficiently 

clearly expressed intention in cl. 8 to 

exclude the consequences of negligence in 

misrepresentation or non-disclosure. As for 

the specific reasons given by the Judge: (i) 

The reliance on "any claim" and "any 

remedy" was misplaced; it was not as

though the clause had said "any" nondisclosure or misrepresentation. (ii) While it 

was true that the obligations of good faith 

are unitary in the sense that a 

misrepresentation or non-disclosure will 

entitle an insurer to avoid his contract even 

in the absence of negligence, nevertheless

that did not answer the question whether the 

parties intended to exclude any remedy for 

negligence, especially as negligence was the 

essence of a cause of action in damages for 

negligent misstatement. (iii) The absence of 

any indication elsewhere in the contract that 

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the parties intended to distinguish between 

the negligent and the merely accidental was

at best a neutral consideration. (iv) The 

opening words of cl. 8 were nothing more 

than a saving provision in the event that any 

part of what followed was impermissible as 

a matter of law.

132. In Toomey v. Eagle Star (No. 2) the 

clause in question merely stated "This

contract is neither cancellable nor voidable 

by either party". Mr. Justice Colman 

considered the Canada Steamshipline of

authorities and concluded that, on a "finely 

balanced" point, the clause did not exclude 

the right to avoid for negligent nondisclosure or misrepresentation nor the right 

to recover damages under s. 2(1) of the 

Misrepresentation Act, 1967. He appears to 

have considered it to be axiomatic that nondisclosure and misrepresentation in the 

insurance context can be negligent as 

distinct from innocent.

133. In HIH v. Chase Manhattan Bank on 

the other hand Mr. Justice Aikens adopted a 

more complex analysis. The clause there 

stated: ". . .the insured will not have any 

duty or obligation to make any 

representations, warranty or disclosure of 

any nature, express or implied. . .and shall 

have no liability of any nature to the insurers

for any information provided by any other 

parties and any such information provided 

by or non-disclosure by other parties. . . 

shall not be a ground or grounds *187 for 

avoidance. . ." He held that the rules of 

construction in Canada Steamship were not 

directly applicable, and in that respect he

differed from Mr. Justice Colman in 

Toomey v. Eagle Star (No. 2) (at pars. 41-45 

of his judgment). He nevertheless concluded 

that even so the parties had not intended by 

the clause in question to exclude either the 

right to avoid for negligent non-disclosure or 

misrepresentation or the right to damages for 

negligent misrepresentation whether at 

common law or under s. 2(1) of the 

Misrepresentation Act, 1967 (see pars. 46, 

72-73, 76, 78-80, 88 and 90).

134. The particular wording of the clause 

before Mr. Justice Aiken was nothing like 

cl. 8, and, with (as I understand it) an appeal 

pending in that case I would not want to say 

anything about his ultimate conclusion as a 

matter of construction of that clause. Of 

particular interest for present purposes, 

however, is his analysis of the Canada 

Steamship line of authority in the context of

the right to avoid an insurance contract for 

non-disclosure or misrepresentation. At pars. 

41-43 of his judgment he said this: 

The rules of construction set out by Lord 

Morton in the Canada Steamship case and 

subsequent cases concern clauses in 

contracts which purport either: (i) to exempt 

a party from the consequences (in damages) 

of the negligence of that party or its 

employees or agents; or (ii) to grant an

indemnity to a party where loss has resulted 

from its negligence or that of its employees 

or agents. The basis for the three well 

known "rules" of construction is that parties 

to a contract will not be presumed to wish to 

exclude liability for negligence of one party. 

Therefore there has to be express words of 

exclusion for negligence (r. 1); or the words 

of the clause have to be wide enough to 

cover liability for negligence, (r. 2); if so,

the clause will only be effective to cover

negligence if it is demonstrated that there is

no other "head of damage" (which is not 

fanciful or remote) which might by covered 

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by the clause (r. 3). 

It seems to me that the second and third 

"rules" of construction are intended to deal 

with cases where the exemption or 

indemnity clause wording has been 

deliberately drawn in a wide and general 

way. It is for that reason that its effect will 

appear equivocal and so the Court naturally

asks: what did the parties actually intend to 

cover by these general words? I think that

the Canada Steamship case rules of

construction were not intended to apply to a 

particular clause that is specifically directed

at exempting liability for the breach of a 

particular type of absolute duty, where the 

breach can be established whether or not 

negligence (or fraud) is proved. 

 In contracts of insurance the duty of 

disclosure of material facts is unitary and

absolute in the sense that there will be a

breach even if the non-disclosure is only

inadvertent. Generally neither negligence

nor fraud need to be demonstrated to 

establish a breach. The same is true of the

duty not to misrepresent material facts. 

Moreover, the consequence of the breach of 

the duty of utmost good faith is that the 

insurer has a right to avoid the contract of 

insurance, rather than damages. So, subject 

to the limitations concerning fraud discussed 

above, it seems to me that provided that a 

clause in a contract of insurance is clearly

and specifically intended to cover the

consequences of a breach of the duty of 

disclosure or the "duty" not to misrepresent

material facts, then the rules of construction

in the Canada Steamship case would not be 

directly applicable to such a clause.

 135. That reasoning appealed to Mr. Justice 

David Steel, and it appeals to me. I also

agree with Mr. Justice David Steel that the 

very concept of a negligent non-disclosure is 

unfamiliar territory. (Fraud is something 

apart.) Moreover, at the time when the 

principles relating to avoidance for 

nondisclosure or misrepresentation were 

developing in insurance law, and at the time 

of the Marine Insurance Act, 1906, there 

was in any event no question of a cause of 

action sounding in damages. Breach of the 

duty of good faith gave rise to no cause of 

action in damages, only to a right to avoid, 

as has recently been affirmed in Banque

Keyser Ullmann S.A. v. Skandia (UK)

Insurance Co. Ltd., [1990] 2 Lloyd's Rep. 

377; [1991] 2 A.C. 249. Damages at 

common law for negligent misstatement 

causing merely financial loss had not yet 

arisen. The Misrepresentation Act, 1967 had 

not yet been enacted. The only remedy lay 

in avoidance. Moreover, the duty of good 

faith, breach of which entitled avoidance but 

nothing else, was an absolute duty. It would 

not occur to anyone to seek to prove

negligence. It ought to follow that it would 

not have occurred to the parties to an 

insurance contract to seek to exclude the 

right to avoid for negligence.

136. In such a context, where a clause such 

as cl. 8 seeks to exclude the right "to avoid

or rescind this Policy. . .on the grounds of. . 

.non-disclosure or misrepresentation. . .", I 

do not see why those words should permit 

insurers to seek to prove negligence in nondisclosure or misrepresentation as the 

ground for a right to avoid for breach of the 

duty of good faith. Since the parties could 

not have had negligent breach of the duty of 

good faith in mind, it seems to me

impossible to say that, in the absence of an

express exclusion of negligence, the parties 

are to be thought of as not intending to 

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embrace any negligent breach of the duty of 

good faith.

 *188 137. Do the new causes of action in 

negligent misstatement or under the 

Misrepresentation Act make any difference? 

I do not think that a cause of action at 

common law has been pleaded, only a 

counterclaim for damages under s. 2(1) of 

the Misrepresentation Act. Such a claim,

therefore, is not covered by the words from 

cl. 8 quoted in the previous paragraph: but I 

do not see why it is not prima facie covered 

both by the additional words of exclusion in 

the first sentence - "any remedy or redress 

on the grounds of. . . misrepresentation. . .or 

any other similar grounds" - ; and by the 

language of the second sentence whereby 

"any and all. . .rights of. . .counterclaim" are 

excluded. Moreover, since negligence is not 

a condition precedent of a right to claim 

under s. 2(1), I do not see why it needs to be 

expressly or impliedly excluded. All a 

claimant under s. 2(1) has to prove is a 

misrepresentation which induced his 

contract. It is then up to the defendant to 

prove the absence of negligence as a 

defence. With respect to Mr. Justice Aikens 

(see par. 90 of his judgment), I do not think 

that a clause such as cl. 8 would have to 

state expressly that "there was no liability on 

the insured even if there was no reasonable 

belief" in the representation complained of.

138. In any event, I agree with Mr. Justice 

David Steel that the language of the clause is 

very wide. Its opening words are words of 

saving, but they emphasize that the language 

of the clause is intended to be read as widely

as they properly can be. I do not see why 

"any claim. . .any remedy or redress on the 

grounds of. . .non-disclosure or 

misrepresentation. . .or any other similar 

grounds" does not embrace a claim based on 

negligent non-disclosure or s. 2(1) of the 

Misrepresentation Act. Moreover, since 

misrepresentation (in the absence of fraud) 

can only give rise to a claim in damages if 

there is negligence and not otherwise, and

since cl. 8 is plainly intended to go beyond 

the exclusion of the right to avoid for 

misrepresentation and to extend to the 

exclusion of "any remedy or redress on the

grounds of. . .misrepresentation", and since 

therefore there could be no remedy or 

redress for misrepresentation other than the 

right to avoid in the absence of negligence, I 

do not see why cl. 8 would not in any event 

pass even the most stringent application of 

the Canada Steamship rules as an exclusion

of the right to claim damages under s. 2(1) 

of the Misrepresentation Act, or, for the 

same reason, of the right to claim damages

at common law for negligent misstatement.

139. The reinsurers placed emphasis in 

their submissions as did Mr. Justice Aikens 

himself (see at par. 77 of his judgment), on 

what Lord Justice Steyn said in E. E. 

Caledonia Ltd. v. Orbit Valve Co., [1994] 2 

Lloyd's Rep. 239 at p. 246, col. 1; [1994] 1 

W.L.R. 1515 at p. 1523H to the effect that - 

. . .Why was an express reference to 

negligence not inserted? Similar questions

have been posed on a number of occasions. 

Why do draftsmen not take note of a clear 

and consistent line of judicial decisions? For 

my part I have no doubt that the draftsman 

on the underground to whom such a

question was addressed would say "one does 

not want to frighten off one or other of the 

parties." Omissions of express reference to 

negligence tend to be deliberate.

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140. That, however, was said in the context 

of a classic application of the rules of

Canada Steamship, not in the context of a 

clause which was dealing with remedies 

inter alia of avoidance arising from nondisclosure or misrepresentation in the 

negotiation of an insurance contract. For 

reasons which I have sought to give above, I 

do not think that it would occur to the 

draftsman in such circumstances to think it 

necessary to provide expressly for 

negligence.

141. For these reasons, this aspect of the 

reinsurers' cross-appeal fails.

(ix) Is cl. 8 specifically incorporated into

the reinsurance contracts by reason of the 

term therein "Cancellation Clause as 

Original Policy"?

142. New Hampshire accepts that cl. 8

forms part of the reinsurance contract by

virtue of a general incorporation said to be 

effected by the condition that "this 

reinsurance is subject to all terms, clauses 

and conditions as original". In its case, 

therefore, the issue currently under 

consideration may add nothing. Axa and 

Independent, however, oppose any 

incorporation of cl. 8 into their contracts.

 143. HIH, which relies on the incorporation 

of cl. 8 into the contracts of reinsurance,

pleaded such incorporation by reference to

the general words found in the condition just

cited. In the event, however, HIH received

an unexpected bonus in the form of the 

evidence of its expert, Mr. Roger Day, who 

was the first to suggest that the words

"Cancellation Clause as Original Policy" in 

the reinsurance slip policy were a specific 

reference to cl. 8, albeit cl. 8 was a type of

clause which he knew more commonly as a 

"non-cancellation" clause. This suggestion 

was discussed between the experts at a joint 

meeting, and the joint memorandum which 

resulted contained this passage: 

4. Messrs Day and Godfrey [Mr. Robert 

Godfrey, Axa's and Independent's expert]

next discussed Clause 8. Mr. Day believes 

Clause 8 to be the non-cancellation 

provision of the policy to *189 which the

reinsurer agreed in signing the reinsurance

slip. Mr. Godfrey believes in having 

reviewed the policy, the cancellation (or 

non-cancellation) clause is more 

appropriately Clause 4.3. . .wherein 

cancellation provisions are mentioned. In 

Mr. Godfrey's opinion Clause 8 does not 

deal with cancellation but more 

appropriately deals with disclosures and 

waivers of rights. Mr. Godfrey believes the 

matter of interpretation of the policy

contract may be more of a matter of law for

the Court to decide rather than the subject of

expert opinion.

144. It may be recalled that cl. 4.3 of the 

policy wording is headed "Amendments to 

the Policy" and states that "This policy may 

not be amended, cancelled, revoked or 

rescinded without the prior written consent 

of the Assured". The experts were not called

to give oral evidence, and their evidence

stood therefore as I have set it out above.

 145. Mr. Justice David Steel dealt with this 

issue at pars. 35-38 of his judgment. He held 

that cl. 4.3 was not a viable option for the

"Cancellation Clause", and that the choice 

therefore lay between cl. 8 or nothing. He

thought it right to give some meaning to the 

specific reference to a cancellation clause, if 

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possible, that on balance the reference was 

to cl. 8, and that it was therefore 

incorporated. Since cl. 8 was specifically

referred to, it did not matter whether the

reinsurers actually knew about it or signed 

the policy wording itself.

146. Axa and Independent submit that the 

Judge was in error. On behalf of 

Independent, Mr. Stephen Ruttle, Q.C. relies 

substantively on the absence of HIH's

pleaded reliance on this contention of 

specific incorporation, submitting that, if the 

point had been pleaded expressly, the role of 

the experts would have been different. On 

behalf of Axa, Mr. Peter Gross, Q.C. refers 

to the absence of HIH's pleading only 

forensically. On the merits of the point, Axa 

and Independent submit that cl. 8 was not 

identified by the words "Cancellation Clause 

", since cl. 8 was neither entitled as a 

cancellation clause, nor dealt with

cancellation (as distinct from avoidance, a 

different concept with different

consequences), nor was regarded by Mr. 

Day as a cancellation clause rather than a 

non-cancellation clause. If, therefore, the 

reference was to anything, it must be to cl. 

4.3. Even if the reference was to cl. 8, 

however, there was no incorporation since 

the reference was "oblique and equivocal" 

and the clause would not work (without an 

impermissible degree of manipulation) in 

the reinsurance context. That last submission 

covers the same ground as question (x) 

below and will be dealt with there.

147. For the rest, I am persuaded in any 

event that it would be wrong to find in the 

term "Cancellation Clause as Original

Policy" a specific reference to cl. 8. I 

discount both the expert evidence and the

absence of any pleading. It might be 

different if there was unchallenged evidence 

that in the insurance market in question cl. 8 

was known as a "Cancellation Clause", or 

even if there was disputed evidence to that 

effect but it was not possible for the Court to

prefer one expert's evidence over the others 

on objective grounds. As things stand, 

however, even Mr. Day's point was made

equivocally: he knows cl. 8 as a "noncancellation" clause. In any event, if the 

experts' evidence were important, the 

absence of any pleading might well be 

significant. As it is, I would prefer to view

the point as a pure matter of construction. 

On that basis, the fact that the term in 

question refers to the clause as "Cancellation

Clause" strongly suggests that it should be 

possible to find a clause whose title is or 

contains the word "Cancellation". Clause 8,

however, is entitled "Disclosure and/or 

waiver of rights". Even in its text, it 

nowhere contains the word "cancellation" or 

"cancel" (not even in any negative form). I 

agree with the submission that avoidance or 

rescission is not the same as cancellation,

since the latter operates under the terms of 

the contract itself and only for the future, 

whereas the former operates by reason of 

common law and relates back. The absence 

of any reference at all to cancellation in cl. 8

can be contrasted, moreover, to its presence 

(in the form "cancelled") in cl. 4.3. I do not 

think that the mere presence of that word 

justifies regarding cl. 4.3 at the 

"Cancellation Clause", for it is entitled

"Amendments to the Policy" and refers only 

incidentally to cancellation; but the contrast

between the texts of cl. 8 and of cl. 4.3 

highlights the difficulty of calling the former 

a cancellation clause when it is only the

latter which refers anywhere to cancellation.

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Moreover, I am not concerned too much 

with the failure of finding a clause to 

identify with the specific reference to a

"Cancellation Clause". Of course, if it could

appropriately be done, well and good. 

However, the original slip policy provides 

the example of a specific reference to a 

"Cross Collateralisation Clause" which does

not appear in the policy wording. Moreover, 

a draft of the policy wording was already 

available at the time of the reinsurance slip

policy, and that draft referred to cl. 4.3 and 

to cl. 8 under their final titles. If it had been 

intended to refer to cl. 8 (or cl. 4.3), I do not 

see why some more appropriate 

identification could not have been chosen.

148. I would prefer to say, therefore, that 

the reference to a "Cancellation Clause" 

simply fails to have content. If, however, I 

were wrong about that, and the reference 

was to cl. 8, then I would agree that it was 

incorporated, even if Axa did not have 

specific knowledge of it, subject to the 

following *190 considerations which are 

dealt with later in this judgment. One is 

whether the clause can work (with or 

without manipulation) in the reinsurance 

context. Of course, where a clause is

specifically incorporated, there is pressure to

see that it does work, if at all possible and if 

necessary by appropriate manipulation. 

Secondly, there is the general question of 

how cl. 8 operates in the reinsurance 

context. Thirdly, however, there might have 

been a question which has only partly been 

considered by the Judge below, and that is 

whether cl. 8 is so unusual a clause (that has 

been considered) and the reference to it as a 

"Cancellation Clause" so unsatisfactory a 

reference (that has not), that it would be 

unfair to give effect to the specific reference.

As it is, that question, in that form, does not 

arise.

149. On this point, therefore, I would 

disagree with the Judge's admittedly 

tentative conclusion.

(x) If there is no specific incorporation of 

cl. 8, is it incorporated into the reinsurance 

contracts by reason of general words of 

incorporation?

150. As already stated, New Hampshire 

accepts that the answer to this question is

"Yes", but Axa and Independent submit that 

it is "No". Mr. Justice David Steel held that, 

if he was wrong about cl. 8's specific 

incorporation by virtue of its identification 

with the "Cancellation Clause" referred to in 

the reinsurance slip policy, then it was in 

any event incorporated by reason of the

general words found there - 

 . . .This reinsurance is subject to all terms, 

clauses and conditions as original and to 

follow that placement in all respects.

151. For the purposes of this present issue, 

I shall for the present leave out of account 

additional factors considered below under 

questions (xi) (does it make any difference 

that cl. 8 is an unusual term, and would its 

incorporation be fair?) and (xii) (does it 

make any difference whether a reinsurer was 

aware of cl. 8?), although I shall have to 

give some consideration at this point to the

final question (xiii) which asks what the 

effect of cl. 8 is, if incorporated into the 

reinsurance contract.

152. Axa and Independent have a primary 

and an alternative case regarding the issue of 

cl. 8's incorporation into their contracts.

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Their primary case is that it is not 

incorporated at all. Their alternative case,

however, is that, if incorporated, its effect is 

merely to emphasize that the reinsurers 

could not complain if HIH paid a claim (by 

reason of cl. 8 being a term of the original 

insurance and thus depriving HIH of 

possible defences) in circumstances where, 

in the absence of cl. 8, no claim would be 

payable at all.

153. Mr. Justice David Steel rejected that 

alternative case, at par. 52 of his judgment, 

in a single sentence, and without giving 

reasons: "I reject the submission that the 

effect is solely to agree to follow settlements 

made by HIH where otherwise HIH would 

have had a defence."

154. Although it is clear that the Judge 

rejected that alternative case, it is not 

entirely clear what effect the Judge thought 

that he was giving to cl. 8 by accepting, as 

he did, HIH's case that it was incorporated

into the reinsurance contracts. On the one

hand he accepted that, as so incorporated, it 

would require a degree of manipulation. 

Thus in par. 41 of his judgment he said: 

Does cl. 8 makes sense? While the 

references to arrangements, with Flashpoint 

are not directly apposite, only a minor

adaptation is required to make the clause 

workable in the context of the reinsurance.

In short, the reference to the "Insurer" needs

to be replaced by the "Re-insurer" and the 

reference to the "Assured" by "Re-assured".

I regard such manipulation as appropriate 

and permissible . . .

155. On this basis, it would seem that the 

Judge considered that cl. 8, when 

incorporated into the reinsurance contracts,

operated there as a clause independent of the 

original insurance and regulating relations 

not between the original assured, LDT, and 

the original insurer, HIH, but independently 

between the reinsured, HIH, and the 

reinsurers.

156. On the other hand, in pars. 43-44 of 

his judgment the Judge addressed the 

reinsurers' submission that incorporation 

was inappropriate because, unlike HIH, the 

reinsurers could not rely on the collateral 

agreements and their warranties concerning,

inter alia, proper disclosure and the exercise 

of the utmost good faith. He rejected that 

submission on the ground that the reinsurers 

could rely on the collateral agreements by 

way of subrogation and added - "Where, as I 

have indicated, the set-up is akin to a

fronting arrangement, I see nothing 

inapposite in treating cl. 8 as incorporated in 

the reinsurance slip." The problem with that 

reasoning, as it seems to me, is that it 

assumes that the exclusion created by cl. 8

in the original insurance and by the 

manipulated cl. 8 incorporated into the 

reinsurance contracts will operate in a back 

to back manner, so that the reinsurers would

be entitled to exercise rights of subrogation 

under the collateral agreements. If, however, 

the non-disclosure or misrepresentation (or 

any other complaint) which would have 

operated as a defence under the reinsurance 

contracts but for the incorporated cl. 8 is not 

equally relevant to the original insurance,

but on the contrary independent of an 

excluded defence under cl. 8 of the original 

insurance, then the situation is not back to 

back and the reinsurers would not be entitled 

to be subrogated to *191 HIH's rights 

against Flashpoint under the collateral 

agreements.

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157. Thus either Mr. Justice David Steel 

was in error in his reasoning in pars. 43-44, 

or, sub silentio, he was giving to an 

incorporated cl. 8 an effect different from 

that which it might seem he was accepting in

par. 41 where he was prepared to manipulate 

the words of the clause so as to enable it to

operate independently between HIH and the 

reinsurers.

158. The importance of this distinction to 

Axa and Independent is that if cl. 8 were 

fully incorporated into their reinsurance

contracts so as to operate independently at 

the reinsurance level, then the reinsurers

could not complain about non-disclosure or 

misrepresentation (or any other ground of 

defence which might be excluded by cl. 8 on 

its true construction) as between HIH and 

themselves. If, however, the effect of cl. 8's 

incorporation into the reinsurance contracts

were merely to bind the reinsurers to a

payment made by HIH where only HIH's 

defence under the original contract were in 

issue, the reinsurers would say that they still 

remained free at the reinsurance level to 

refuse payment to HIH where there was, for

instance, a separate ground of avoidance in 

the circumstances of the placement of the 

reinsurance.

159. Thus in its skeleton argument, Axa 

put the matter in the following way: 

75. What clause 8 does not do is prevent 

reinsurers avoiding the reinsurance itself on 

the grounds of a breach of duty of good faith

by HIH (or its agents) in the course of the 

placement of the reinsurance contract. 

76. In effect, if clause 8 is incorporated 

into the reinsurance contract, reinsurers are

thereby agreeing that they are content for 

HIH to waive any rights or defences it might 

otherwise have. That is a personal decision 

for HIH but one that requires reinsurers' 

approval if it is to bind reinusurers. What 

reinsurers are not, however, agreeing to do 

is give up their own rights and defences. 

That would be a personal decision for 

reinsurers and not one it should be 

concluded they have made by the 

incorporation of someone else's waiver. 

77. Only by so construing clause 8 is the 

need for any manipulation of clause 8 

avoided, while giving clause 8 effect and 

purpose in the reinsurance contract. The 

learned judge should have construed clause 

8 accordingly.

 160. Independent, in its skeleton argument, 

put the matter in this way: 

 12.(i) The presumed intention of both

parties in seeking to incorporate clause 8

into the reinsurance must have been to bind

the reinsurers to follow HIH's settlements to 

its insured; or at least to avoid any argument 

about HIH's entitlement to recover such 

settlements. 

 (ii) Their presumed intention cannot have 

been to leave unresolved the question of the

liability of reinsurers for such payments. . 

.and to amount to a waiver by reinsurers of 

breaches of duty of utmost good faith by 

HIH. First this would leave a significant and

uncertain gap in coverage. Secondly, the 

release by HIH of its insured from the

consequences of the latter's breaches of duty 

of utmost good faith is met, commercially, 

by a side agreement [the collateral 

agreement] between HIH and Flashpoint; to 

which the reinsurers would be subrogated 

where a breach by Flashpoint leads to a 

claim. There is no corresponding agreement 

to compensate reinsurers for their release of 

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HIH from the consequence of that party's 

breaches of duties of utmost good faith. . 

.Assume the disclosure by the insured to

HIH, at the request of Flashpoint, of 

fundamentally important information. HIH 

omits to pass on this information. 

Alternatively, assume the omission of HIH, 

on placing of the reinsurance, of material 

information about HIH's underwriter or 

about HIH's own investigation into the risk 

or that HIH had only written the risk as a 

favour to the broker. In none of these 

instances would the reinsurers have any 

subrogated recovery from Flashpoint 

because none of these omissions would 

amount to a breach by Flashpoint of any 

duty owed by it to HIH. 

 (iii) The expert evidence. . .was consistent

with the parties' having wished clause 8 to 

have had the. . .effect [of the alternative 

submission]; but inconsistent with them 

having wished the clause to have the. . 

.effect [contended for by HIH] . . . 

14. Independent accepts that it will be 

easier to show that clause 8 is incorporated

into the reinsurance if its effect, once

incorporated, is as a follow settlements 

provision. . .Thus no manipulation of the 

clause would be required. However, general 

words of incorporation would not be 

sufficient to bring in the clause, even on 

such a basis.

161. It will be clear from these citations,

and it became even clearer in oral argument, 

that the real battle-ground between HIH on 

the one hand and Axa and Independent on 

the other on this issue regarding 

incorporation of cl. 8 related to the effectof 

incorporation, rather than the factof 

incorporation itself. If incorporation merely 

had the effect of the reinsurers' alternative 

submission, then they were quite prepared to 

live with it. Moreover they accepted that on

this basis the clause did not require 

manipulation, and that the expert evidence 

(directed *192 primarily to the question of

whether cl. 8 was a usual clause, but 

trespassing onto a discussion of its purpose 

and effect) was consistent with their 

alternative submission. Nevertheless, their 

primary submission was not abandoned, and 

it is to this that I now turn. In doing so, 

however, it is necessary not to lose sight of

the question of the effect which 

incorporation in one form or another might

have on the relations between the parties.

162. Axa and Independent put forward 

their submissions that cl. 8 is not to be 

incorporated into the reinsurance contracts

by reference to a number of well known 

criteria, also considered by Mr. Justice 

David Steel below. Thus, is the clause in 

question germane to the reinsurance, or 

merely collateral? Does it make sense 

without undue manipulation? Is it consistent 

with the express terms of the reinsurance? Is

it apposite for inclusion in the reinsurance?

163. On these criteria, which he 

approached in that order, Mr. Justice David

Steel held as follows (at pars. 39-44). Clause 

8 is germane, for, although it is not part of 

the central definition of the risk, it is

material to the nature and scope of the risk 

in the same way as an exceptions clause is

germane to the shipment, carriage and 

discharge of goods under a bill of lading. It 

is not collateral in the sense that an

arbitration or choice of law or jurisdiction

clause is collateral. It does make sense,

albeit with some manipulation, and is 

apposite to the back to back fronting 

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arrangement which is how he saw the 

transaction as a whole (see above). It is not 

inconsistent with any of the express terms of 

the reinsurance contract.

164. It is convenient to start with the 

questions whether cl. 8 makes sense, with or 

without manipulation, and whether it is 

apposite, when read into the reinsurance 

contracts. These are linked questions, as I 

have already indicated above in my analysis 

of the Judge's conclusions and reasoning in 

respect of them.

165. I start with the assumption, and I 

stress the word assumption, that the 

insurance and reinsurance contracts were 

intended to be back to back and that, as the 

Judge said, the set-up was akin to a fronting 

arrangement. Those matters are in dispute,

and the extent of the inferences that may be

derived from them are likewise in dispute. 

Indeed the reinsurers criticize the Judge for

starting from the premise of a presumption 

that the insurances were intended to be back 

to back.

166. I wish to be cautious, which is why I 

use the word assumption. I wish to be 

cautious because of the combination of

circumstances that there has been no 

agreement or agreed assumptions as to the 

facts of the placement of these insurances,

no investigation of them, and yet there is a 

dispute about such matters. What is a Court 

to do in such a situation? Since the

preliminary issues are there to be answered, 

I think the Court must try to do so, if it can

do so without potential injustice or the 

likelihood of error. In such circumstances I 

do not think it is unfair or likely to turn out 

to be in error to assume that the insurances

were intended to be back to back or that the 

set-up was akin to a fronting arrangement. I

have in mind both the facts stated earlier on 

in this judgment, and the general principle 

that in the context of facultative reinsurance,

as here, there is a presumption, aided by 

general words of incorporation such as those 

found in this case, that the parties intended 

at least the scope of the cover to be back to 

back, so that a risk falling within one will 

fall within the other. If a subsequent 

investigation of the facts shows that a 

different conclusion is required, then I 

acknowledge that nothing said here should 

pre-empt findings of fact yet to be made, or 

any necessary inferences of construction to 

be made on the basis of those facts. In the 

meantime, I must proceed as best I can.

167. As for the general presumption of

back to back reinsurance, I would refer to 

what Lord Justice Kerr said in Citadel 

Insurance Co. v. Atlantic Union Insurance 

Co. S.A., [1982] 2 Lloyd's Rep. 543 at p. 

546: 

The conditions of the cover were 

described "as original" with certain

qualifications. This is usual and means no

more than the terms of the reinsurance cover

are to be the same as those of the original,

i.e., reinsured policies.

168. In Forsikringsaktieselskapet Vesta v. 

Butcher, [1989] 1 Lloyd's Rep. 331 at p. 

336, col. 1; [1989] A.C. 852 at p. 895B-C 

Lord Griffiths spoke in perhaps even 

broader terms of reinsurance being back to 

back with insurance. He said: 

 . . .In the ordinary course of business 

reinsurance is referred to as "back-to-back" 

with the insurance, which means that the

reinsurer agrees that if the insurer is liable

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under the policy the reinsurer will accept 

liability to pay whatever percentage of the 

claim he has agreed to reinsure. A reinsurer 

could, of course, make a special contract 

with an insurer and agree only to reinsure

some of the risks covered by the policy of 

insurance, leaving the insurer to bear the full 

cost of the other risks. Such a contract 

would I believe be wholly exceptional . . . 

See also Groupama Navigation et Transports 

v. Catatumbo C.A. Seguros, [2000] 2 

Lloyd's Rep. 350 at pp. 352-353 and Mann 

and Holt v. Lexington Insurance Co., [2001] 

1 Lloyd's Rep. 1 at pp. 6-7.

169. In the present case there is not only 

the general incorporation clause already

cited, but also *193 the following further 

indicia of an intention of a back to back 

policy: the fact that "TYPE" and 

"INTEREST" are stated to be "As Original

Policy"; the fact that the premium is the

same ("Original Net Premium. . ." etc.); the

fact that the amendment clause is intended

to bind reinsurers, subject to consultation

and their agreement being obtained, to "all 

amendments and alterations to the terms,

clauses and conditions of the Original 

Policy"; and the fact that reinsurers promise 

to pay any claim and professional advisers'

fees and expenses "incurred under the 

Original Policy. . .at the same time". I agree

that such terms do not in themselves answer 

any particular question as to the scope of 

incorporation (see e.g. Gan Insurance Co. 

Ltd. v. Tai Ping Insurance Co. Ltd., [1999] 

Lloyd's Rep. IR 472) but they certainly 

support the general presumption that the 

insurance and reinsurance are intended to be

back to back.

170. I turn then to cl. 8 in particular, and 

ask whether it would make sense and be 

apposite or appropriate in the reinsurance. 

The first rule of incorporation, of course, is 

to test the allegedly incorporated term in the 

context of the incorporating document by 

writing it out verbatim in the latter. In that 

context the question immediately arises as to

whether cl. 8 should be manipulated or not, 

for if it is not, then it refers to the situation

between HIH and the original assured rather

than the situation between HIH and the

reinsurers. There is nothing unusual about 

such manipulation, provided it can be done 

simply and deftly as a matter of language, 

where everything points to the incorporation 

of the term in question. Thus in bill of lading 

and charter-party cases, where the terms of a

charter-party are often incorporated in a bill 

of lading, a charter-party term which refers 

to the "charterer" may in the context of the 

bill of lading have to be understood as 

referring to the "bill of lading holder". In the 

reinsurance context, such manipulation has 

been approved in CNA International 

Reinsurance Co. Ltd. v. Tranquilidade S.A., 

[1999] C.L.C. 140, a case relied on by the 

Judge below, where Mr. Justice Clarke, in 

order to maintain what he regarded as

"essentially a fronting arrangement" in good 

back to back order, held that references to 

"the assured" were references to the 

"reassured" and so on (at pp. 151-152). On 

the other hand, Miramar Maritime 

Corporation v. Holborn Oil Trading Ltd. 

(The Miramar), [1984] 2 Lloyd's Rep. 129; 

[1984] A.C. 676 is a warning that the need

to manipulate in uncertainly apposite 

circumstances is a pointer against 

incorporation.

171. In my judgment there are two grounds 

which indicate that cl. 8 should not be 

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manipulated in the present case, one 

linguistic and the other a matter of the 

reason of the thing. The linguistic grounds is 

that if "the Insurer" in cl. 8 is under- stood, 

in the reinsurance contract, to be referring to

"the Reinsurer", then the clause does not 

make sense: for the clause goes on to speak 

of "its arrangements with Flashpoint Ltd", 

where "its" must, in the manipulated 

version, refer to the reinsurer, but cannot 

properly do so, since it is only HIH which 

has arrangements with Flashpoint. Mr. 

Justice David Steel referred in passing to 

this difficulty when he said (at par. 41) that 

"the references to arrangements with 

Flashpoint are not directly apposite"; but he 

did not solve the difficulty, and I do not 

think that it can be solved. The other ground 

is that, although the rationale of the 

manipulation is to preserve the contracts 

back to back, this purpose is not achieved, 

but thwarted, by the manipulation: for it 

does not follow that because HIH has 

waived its right to avoid for breach of the 

duty of good faith by its assured, LDT, that 

the reinsurers should also waive what might 

be an entirely different and independent

breach of the duty of good faith on the part 

of HIH. That would be the very antithesis of 

a back to back contract. Thus it could be that 

there is no breach as between LDT and HIH, 

but HIH is personally guilty of some

independent nondisclosure or

misrepresentation as between it and a 

reinsurer. In such a case, if cl. 8 was 

incorporated in the reinsurance contract in

manipulated form, the reinsurer would 

neither have a defence against HIH nor a 

claim by way of subrogation against 

Flashpoint.

172. In my judgment, therefore, cl. 8 

cannot be incorporated in manipulated form 

into the reinsurance contracts. It does not 

make sense, cannot be successfully 

manipulated, and, even if it could be, could 

have an effect contrary to the reason of the 

thing. On the same basis, it can be said that 

the clause in such a form would not be 

consistent with the express terms of the 

reinsurance, neither with their spirit nor with

their letter, since such a clause might make 

it impossible for the reinsurance to "follow 

the placement in all respects". In the 

circumstances, it does not matter whether 

the clause in such a form is germane or 

collateral, but in my opinion, for reasons 

which I will express below, it is germane

and is not collateral.

173. The question next arises whether the 

incorporation of cl. 8 in unmanipulated form

would make sense and be apposite. I do not 

think that Axa and Independent would 

submit that it would not. If I am wrong 

about that, however, let me say that I think it 

would make sense and would be apposite. 

There can be nothing senseless or inapposite 

about the reinsurers' alternative submission. 

That would, however, still leave open the 

question whether the reinsurers' alternative 

submission as to the effect of the 

incorporation of an unmanipulated cl. 8 is

the only solution to be considered. I shall 

return to that *194 question under question 

(xiii) below. In the meantime I would 

merely observe that there is an oddity and

uncommerciality in a situation where the

reinsurers have agreed to pay even though 

there has been non-disclosure or 

misrepresentation in the placement of the 

original insurance with HIH (or some other

such fault within the waiver of cl. 8) if the 

reinsurers could at the same time reject any

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liability to pay on their part on the ground of 

the identicalnon-disclosure or

misrepresentation in the placement of the 

reinsurance with themselves.

174. Is cl. 8, whether in manipulated or 

unmanipulated form, germane to the 

reinsurance? The reinsurers had two main 

arguments for saying that it was not. The 

first was that a clause in this context is only

germane if it relates directly to the scope of 

the cover. Otherwise it is merely collateral, 

and authorities demonstrate that merely

collateral clauses are not incorporated. 

Secondly, a clause excluding the 

consequences of avoidance can only be 

effective if it survives avoidance: but to

survive avoidance, such a clause has to be 

collateral to the main contract, like an

arbitration clause, an archetypal example of 

a clause which is not incorporated by

general language, only by express reference.

175. Like the Judge below, I am not 

persuaded by these submissions, nor by the 

authorities which are relied on in support of

them. A leading authority on the 

incorporation of terms (in the marine 

context) is Thomas & Co. Ltd. v. Portsea 

Steamship Co. Ltd., [1912] A.C. 1. The rule 

is that a general incorporation clause only 

brings with it terms which are "germane to. . 

.the proper subject-matters" of the 

incorporating contract (per Lord Atkinson at 

p. 6). Where bills of lading incorporate 

charter-party terms, those proper subjectmatters are clauses "germane to the receipt,

carriage, or delivery of the cargo or the 

payment of freight" (ibid.). Such terms

commonly include exception clauses 

relating to those subject-matters. I do not see 

why a clause like cl. 8 is not germane to a 

reinsurance contract, nor to the scope of the 

risk accepted by the reinsurer. The reason

why an insurer is entitled to avoid his 

contract for (material) non-disclosure or 

misrepresentation is that he calculates the

risk that he is prepared to run and the 

premium that he stipulates for running that

risk on the basis of the information he is 

given. Clauses affirming that common law 

position, or altering it, seem to me alike to 

be germane to the risk covered, even though 

they do not seek to define that risk, as 

coverage clauses or warranty clauses seek to

do. In CNA International v. 

TranquilidadeMr. Justice Clarke held that a 

clause which affirmed the common law 

position was incorporated from a 

reinsurance into an insurance (at pp. 144-

145).

 176. In principle, therefore, cl. 8 is 

germane to the reinsurance. This is a fortiori 

the case for cl. 8 in its unmanipulated form, 

for as such it affirms the reinsurer's liability

to pay where the original insurer must pay, 

even in circumstances where in the absence 

of cl. 8 the original insurer might have had a 

defence. In its unmanipulated form it is, as 

the reinsurers themselves recognize, a form 

of "follow the settlement" clause. Nothing 

could be more germane to a reinsurance than 

a form of follow the settlement clause.

177. On what basis therefore do the

reinsurers say that cl. 8 is not germane?

They refer to the following authorities. In 

Pine Top Insurance Co. Ltd. v. Unione 

Italiana Anglo Saxon Reinsurance Co. Ltd., 

[1987] 1 Lloyd's Rep. 476 at pp. 480-481 

Mr. Justice Gatehouse declined to 

incorporate an arbitration clause into either a

reinsurance or a retrocession. He gave two 

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main reasons, the first that only terms which 

"define the risk" are incorporated, the 

second that he would in any event follow the 

bill of lading cases to hold that an arbitration 

clause is not incorporated without express

provision. But he included "Exceptions. . 

.and the General Exceptions" (at p. 480) in 

his view of terms which define the risk.

 178. Aughton Ltd. v. MF Kent Services 

Ltd., [1991] 31 Con. L.R. 60 concerned

construction contracts: did a sub-subcontract incorporate the main contract's

arbitration clause? Again, the Court said no, 

albeit the two-Judge Court of Appeal 

differed in the route by which each of them 

got there. Lord Justice Ralph Gibson 

thought that arbitration clauses could be 

incorporated by general words, but held that 

on the facts there was no agreement in 

writing within the Arbitration Act, 1950. 

Nevertheless, he distinguished (at p. 77) 

between terms which "define the rights and

obligations of the parties with reference to

the subject-matter" and those which control 

or affect the "rights of the parties to enforce 

those rights and obligations by proceedings

at law". There is nothing in that distinction 

which to my mind would allocate cl. 8 to the 

latter category. Sir John Megaw, however, 

directed himself by reference to Thomas v. 

Portsea and emphasized the special factors

which relate to arbitration clauses, such as 

their effect in precluding parties from

bringing a dispute before a Court of law, and 

their nature as a self-contained contract 

collateral or ancillary to the substantive

contract, a "category of their own" (at pp. 

87-88). Again, there is nothing at all in that

which seems to me to be relevant to cl. 8. 

On the contrary, Sir John Megaw described 

germane terms relating to the subject matter

of a contract as including "clauses of 

substantial commercial importance - for 

example, exception clauses. . ." (at p. 86).

179. Thirdly, the Court was referred to 

Excess Insurance Co. Ltd. v. Mander, [1997] 

2 Lloyd'sRep. 119 *195 , where again the 

Court refused to incorporate an arbitration 

clause (into a retrocession contract). In the 

course of his review of the authorities, Mr.

Justice Colman pointed out (at p. 125) that - 

 . . .the Courts impute to the parties to the 

bill of lading contract a mutual intention by

their use of general words of incorporation 

to write into their contract only the

corresponding subject-matter of the

incorporated contract because they are taken

to treat merely ancillary or collateral 

provisions, such as an arbitration clause as

by their very nature essentially personal to 

the parties to the incorporated contract.

180. Mr. Gross emphasized the expression 

"personal to the parties" as being relevant to 

the situation encompassed in a clause 

dealing with the placement of an insurance 

or reinsurance contract, viz. cl. 8. However, 

that expression has to be read subject to the 

reason of the topic being discussed. An 

arbitration clause is patently an ancillary or 

collateral provision which is personal to the

parties: arbitration is private and

confidential and cannot be conjoined with 

another arbitration without the consent of all 

the parties.

181. In sum, I see no reason to ally cl. 8 

with clauses like arbitration clauses or other 

clauses concerned with dispute resolution,

such as jurisdiction clauses, or notice 

clauses, to mention the subjects of other 

decisions to which the reinsurers' skeletons 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

make reference.

182. The second strand of argument under 

this heading was the submission that cl. 8

was collateral, indeed had to be collateral,

because otherwise it could not itself survive 

avoidance. In this respect cl. 8 was said 

again to be analogous to an arbitration 

clause, which has to survive even the 

discharge or frustration of its host contract if 

it is to direct the parties' obligation to 

arbitrate. I did not understand the logic of 

this submission. Clause 8 does not have to 

survive avoidance, because it prevents

avoidance, by waiving the right to exercise 

an entitlement to avoid. Despite Mr. Gross'

citation, in support of his submission, of 

what Mr. Justice Colman said in Toomey v. 

Eagle Star (No. 2) at p. 91, where he also 

referred to a passage from Lord Justice 

Steyn's judgment in Pan Atlantic Insurance 

Co. Ltd. v. Pine Top Insurance Co., [1993] 1 

Lloyd's Rep. 496 at p. 502, I do not 

understand those passages as stating that a 

clause excluding a right of avoidance is a 

collateral contract or has to be one in order 

to be effective, merely that if a clause is to 

have that effect, then it has to be done 

clearly, even expressly. Indeed, Lord Justice 

Steyn may be read as saying that an antiavoidance clause is to be contrasted with an

arbitration or exclusive jurisdiction clause,

which are "procedural in char- acter and

discrete from the remainder of the contract".

183. In my view cl. 8 shares with an 

arbitration clause none of those 

characteristics which have marked the latter 

out for special (I do not say unique) 

treatment. It is not collateral either in the

sense that it is concerned with the resolution

of disputes, and in that context the making 

of claims, as distinct from substantive rights, 

or in the sense that it is intended to survive

the death of its host contract. It is not 

procedural. It is not personal in the sense in

which that term is used in the arbitration

context.

184. I would therefore reject the 

submission that cl. 8 could not be 

incorporated into the reinsurance contracts

because it is not germane, but collateral.

185. Finally, under this issue, the criterion 

of consistency with the other terms of the 

reinsurance contracts was raised. Clause 8

was said to be inconsistent with the common 

law duties of good faith which would 

otherwise exist in relation to the reinsurance

contracts. Thus it is said that the clause is

inconsistent not with any of the express 

terms of the reinsurance contracts, but with 

the standard common law position. It seems 

to me that this point has cogency in relation 

to cl. 8 in its manipulated form. I agree that 

an exclusion of a standard and important 

common law obligation should not easily be 

regarded as incorporated by merely general 

words. The fact that the exclusion will only

operate as an independent term of the

reinsurance contract if its language is

manipulated as the Judge was minded to 

allow, to my mind emphasizes the difficulty

of the incorporation.

186. However, there is not the same

difficulty if the incorporation is in the 

unmanipulated form.

187. In sum, therefore, I would conclude 

that, in the light of the criteria discussed

under this question, cl. 8 is not to be 

regarded as incorporated into the 

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reinsurance contracts in its manipulated 

form, but can, subject to the further 

questions to be considered below, properly 

be regarded as incorporated in its 

unmanipulated form.

(xi) For these purposes, does it make any 

difference whether cl. 8 is an unusual term? 

Is it an unusual term? Is incorporation of 

such a term "fair"?

188. Axa and Independent submitted that 

cl. 8 was an unusual term and that this was a 

further reason why it should not be regarded 

as incorporated by words of general 

incorporation. They further submitted that, 

because it was an unusual term, it would not 

be fair to regard the reinsurers as bound by 

cl. 8.

189. On these submissions it was 

Independent, rather than Axa, that made the

running, since *196 Independent had a 

positive case that, because, unlike the other

two reinsurers, it had not endorsed a copy of 

the policy wording, it was unaware of cl. 8. 

Therefore, it was said, it could not be bound 

by an unusual clause, or should not be 

bound by an unusual clause because that 

would be unfair. In the background, 

moreover, but not part of these preliminary 

issues, lies an additional argument that the

presentation was itself unfair because of the 

inclusion of an unusual clause. That might 

be a ground for avoidance of the whole 

reinsurance, rather than merely for the

exclusion of a clause from being 

incorporated.

190. Although it was Independent that 

made the running on these issues, Axa 

joined in them, even though it had endorsed 

a draft of the policy wording which included 

cl. 8. It joined in on the basis that, even so, it 

could not necessarily be assumed to have 

been aware of the clause; and the issue of

awareness was not for determination at the 

trial of preliminary issues. It also, I think, 

submitted, but in a rather muted way, that, if

cl. 8 was an unusual term, then it would not 

be effectively incorporated in any of the 

contracts of reinsurance by merely general 

words of incorporation: that that was a 

matter of construction which was not 

affected by the special knowledge of any 

particular reinsurer. I would have thought 

that, if the clause were an unusual one, the 

last point may be formally open, but that, in 

the light of the Axa's endorsement of the 

policy wording, it might prove to be an 

ambitious submission since, quite apart from 

awareness, a party is usually bound by its 

signature. However, I see that in an

insurance context there remains the point 

that a presentation involving an unusual 

term may be unfair.

 191. Mr. Justice David Steel dealt with this 

issue as follows. On the question of fact, he 

reviewed the evidence of the two experts in 

the light of their respective experience and 

said that he thought it right to place much 

greater reliance on the views of Mr. Day 

(HIH's expert) because he alone had

experience of the relevant class of insurance 

in the London market, whereas Mr. 

Godfrey's experience lay in the U.S. He

found that insurance of this type in the U.S. 

market was for relevant purposes written in 

significantly different terms in that it was

unconditional and irrevocable and therefore 

had no need for a clause like cl. 8. He found 

that Mr. Day's evidence was that clauses

such as cl. 8 were often requested and

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(Cite as: [2001] 2 Lloyd's Rep. 161)

"sometimes agreed" and added (at par. 47): 

Quite where this leaves the clause on the 

spectrum from usual to unusual is not easy 

to identify. At one extreme, I do not

categorize it as unconscionable or 

extortionate: at the other, it is not standard 

or customary.

192. In the light of that finding the Judge 

went on to consider the legal test to apply. 

He rejected a submission that for general 

words of incorporation to be effective a

clause had to be well known and in common 

use and held that as a matter of general 

principle the question was whether the term

was sufficiently unusual or uncommon so 

that it would be unfair in all the 

circumstances to hold the party to it: see

Interfoto Picture Library Ltd. v. Stiletto 

Visual Programmes Ltd., [1989] Q.B. 433. 

He then resolved that question by holding 

that it was fair to all the reinsurers to treat 

the clause as incorporated by the general 

words. He gave six reasons for his 

conclusion (at par. 50). They were as

follows: 

 (i) This is a contract of reinsurance, which 

is intended to be back to back with the 

underlying insurance. 

(ii) It is expressly subject to "all" terms 

and to "follow that placement in all 

respects". 

(iii) The clause in question is no sense 

unique in this class of insurance, particularly

where there is a collateral agreement. 

 (iv) The slip records that information is 

available on the brokers' file: this would 

have included drafts of the wording. 

(v) As a matter of commercial 

convenience, it is desirable that all 

reinsurers subscribing to the same slip 

should contract on the same terms. 

(vi) Insofar as aspects of good faith arise, 

individual reinsurers may be able to avoid 

the policy if the presentation to them, 

including considerations of notice of the 

clause, was unfair.

193. He nevertheless recognized that the 

last question, which lay outside the 

preliminary issues, was rendered difficult for 

the reinsurers by his reasoning, in that if

there is notice adequate enough to allow 

incorporation, on the test he applied, "it may 

be a rare case where the same notice is not 

adequate to discharge the obligation of good 

faith" (at par. 47).

194. Thus the Judge found that cl. 8 was

not standard or customary, but in no sense 

unique, and that in all the circumstances it 

was fair to regard it as incorporated.

195. In this Court there was no submission 

that Mr. Justice David Steel adopted the 

wrong test. Mr. Ruttle himself relied on 

Interfoto v. Stiletto. Nevertheless it was 

submitted that on the expert evidence he

should have found that cl. 8 was highly 

unusual if not unheard of, and that on the 

test applied he should have concluded that it 

was unfair to treat the clause as incorporated 

or binding. As for the Judge's six specific 

points, (i) was disputed, and both (i) and (ii) 

were said to beg the question; (iii) was said

to be either a wrong categorization of the 

evidence, or in any event neutral; (iv) was

said *197 to be neutral or to beg the 

question in the sense that it remained the

broker's job to draw the reinsurers' attention

to clauses of this nature; (v) was said to be

neutral by Mr. Gross and was criticized by 

Mr. Ruttle as overlooking Independent's

submission that the facts of the placement 

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(Cite as: [2001] 2 Lloyd's Rep. 161)

indicated that the brokers were repeatedly

instructed by HIH to ensure that the 

reinsurers saw and approved the policy 

wording; and (vi) was said to be circular, or 

even wrong, in that if the clause was 

incorporated, it precluded avoidance.

196. On the part of HIH, Mr. Flaux 

submitted that the Judge's findings were 

correct and supported his legal conclusions. 

He stressed that the incorporation clause put 

the reinsurers on notice as to the existence of 

the underlying terms of the original 

insurance, and that the draft policy wording 

was available on the brokers' file to which 

the reinsurance slip policy specifically

referred reinsurers under the

"INFORMATION" line (the Judge's point 

(iv)). He also submitted that if the reinsurers

were aware of cl. 8, then unusual or not, it 

was binding; and that endorsement of the 

policy wording by Axa (on the 7.23 slate) 

showed that it was aware. Thus actual or 

constructive notice of cl. 8 made the issue as 

to its usualness irrelevant.

197. I make the preliminary comment that 

this is, structurally speaking, a difficult 

issue, for a number of reasons. First, the 

experts' evidence was not tested by crossexamination and thus its value and effect are 

harder to ascertain. Secondly, it may be

important to consider, but not easy to 

discern, what meaning the experts were 

ascribing to cl. 8 in the context of the 

reinsurance. Thirdly, the Interfoto test, of

fairness in all the circumstances, is a

problematic one to apply at this trial, both

because of the uncertain status of the facts 

and also because it closely overlaps with the 

question of fair presentation which lies 

outside the scope of these preliminary 

issues.

198. Having said that, I address the experts'

evidence, starting with their experience. Mr. 

Day had considerable experience in the 

London financial risk market and 

specifically in film finance business.

 199. Mr. Godfrey's experience, on the other 

hand, lay in the U.S. financial guarantee 

insurance (and reinsurance) market. He 

defined that market (I am putting the matter 

broadly) as one in which debt instruments of 

investment grade are guaranteed or insured. 

The essence of such insurance is that it is 

"non-cancellable", by which the Judge 

understood him to mean unconditional as 

well as irrevocable. He emphasized that

performance of "the most rigorous due 

diligence" is essential to this type of

insurance, for the very reason that it is

unconditional. Policies are often supported 

by collateral agreements. He annexed 

policies, which were (a) brief, (b) in

standard form, and (c) contained a short 

term to the effect that "This policy is noncancellable [for any reason]". However, as

he remarked, there is no term waiving any 

defence of non-disclosure or 

misrepresentation. Reinsurance of a

"portion" of the insurance is customary, the

1999 average being 38 per cent. The 

reinsurer generally agrees to follow the form 

of the primary cover "including its noncancellation provision", but it is "highly 

unusual" for a reinsurer to waive any 

defences as against the insurer and he had

never before seen a clause such as cl. 8 (this

comment may have been confined to the 

reinsurance context). On the contrary, the

reinsurer relied on the insurer's due 

diligence and disclosure of all material and

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relevant information. Mr. Godfrey stated 

that the HIH insurances were not, in his 

opinion, standard financial guarantee 

insurance, for HIH did no due diligence and 

the insurance was not of investment grade 

debt but was designed to lift the project to 

investment grade and was therefore 

inherently riskier. He therefore regarded the

insurance as "atypical".

200. Mr. Day pointed out in turn that there 

was an essential difference between the 

London market in which he was experienced 

and the U.S. financial guarantee market of 

which Mr. Godfrey spoke. The latter was

concerned with investment grade security 

transactions, the relevant insurers were risk

averse, the premium rates were low, but the

sums insured very high. The London market, 

however, was more diverse, and included 

non-investment grade transactions, such as 

the instant insurances, where there was real 

risk and a higher rate of premium.

Moreover, the London market was more 

comfortable with its traditional mixture of

conditions and exclusions. I would comment 

that the bespoke nature of the London 

market contract and the standard form nature 

of the policies annexed by Mr. Godfrey 

illustrate and highlight the differences in the

two markets.

 201. In the circumstances I fully accept Mr. 

Justice David Steel's conclusion (at par. 46 

of his judgment) that there were significant 

differences between the experience of the 

two experts and the markets in which they 

operated, and that Mr. Day's experience 

justified greater reliance on his evidence.

202. Mr. Godfrey's evidence as to the 

unusualness of cl. 8 reflected his experience 

in general. Thus he had never seen such a 

clause before at any rate in a reinsurance, 

and he went on to say that it is "unusual" 

and atypical in an underlying policy, and 

"highly unusual" in a reinsurance contract as 

applying to the position between reinsurer 

and reinsured. He added "The reinsurer has 

the right to *198 expect full and complete 

due diligence and disclosure from the 

insurer. . .I am unaware of any reinsurance 

contract in my experience where the 

reinsurer agreed to waive its defences".

203. Mr. Day's evidence on the other hand 

was to the effect that "this type of clause is 

by no means unknown". He has seen them in 

financial risk insurances and more 

specifically in film finance risks "where 

similar clauses exist". This type of clause is

often requested by the assured and is "by no 

means a clause which does not exist in this

type of insurance". It is "certainly not 

unknown to have a clause of this type in 

financial risk insurance, including film 

finance business". "Not unknown" was a 

phrase used twice more in Mr. Day's 

supplementary report.

204. In my judgment Mr. Godfrey's

evidence was not of much assistance, 

because the market in which he operated 

was materially different, because his

evidence reflected that different experience,

and because at any rate at the reinsurance 

level he was concerned with a clause whose 

effect was to operate independently as 

between reinsurer and reinsured. I have 

already sought to give my reasons as to why 

cl. 8, even if incorporated, does not operate 

in that sense. Therefore the essential 

evidence to be considered is that of Mr. Day. 

His somewhat tortured language discloses 

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that he is unable to say that cl. 8 is "usual" 

or even "not unusual": rather it is "not 

unknown" or "by no means unknown".

205. It seems to me that Mr. Justice David 

Steel was a perfectly entitled to find that 

such clauses are "sometimes agreed" 

particularly when supported by a collateral 

agreement, even though "not standard or 

customary". I would express the evidence in

the same way. I also agree with him that I 

would not categorize such a term as 

unconscionable or extortionate. Albeit in a

different market, such clauses are known to 

the Courts in the field of professional 

liability indemnity insurance. If not 

unconscionable there, I do not see why they 

should be unconscionable here. The Judge 

also said that he was unsure where this

evidence leaves the clause on the spectrum

from usual to unusual. I would be prepared 

to say that the clause was unusual, but 

something which the market would 

recognize.

206. What then? Is a clause of such a kind 

disqualified from incorporation by general 

words? The reinsurers relied on 

MacGillivray on Insurance Law, 9th ed., 

1997, at par. 33-52, headed "Unusual 

terms": 

It has been held that a reinsurer is not 

bound by the incorporation of terms unless 

they are well known and in common use. 

The reasoning is that the reinsurer may not

be entitled to see, or will not in practice be 

aware of, the precise terms of the underlying 

insurance. It is submitted that the fact that a

clause is highly unusual may be relevant to 

the question of whether the parties intended 

that clause to be incorporated into their

contract. A different way of approaching the 

problem is that, while the actual 

incorporation of the term does not 

necessarily depend upon how usual it is, this 

factor is relevant to the question of whether 

the term ought to have been disclosed to the 

reinsurer.

207. The reinsurers relied on the two cases 

cited by MacGillivray in support of the first 

sentence of that passage. The Judge 

considered that the cases were only authority 

for the proposition that reinsurers are bound 

by usual terms, even to the extent of 

overriding an inconsistency, and that 

whether general words of incorporation can 

import an unusual or uncommon term "is 

quite a different question". In Marten v. The

Nippon Sea and Land Insurance Co., (1898) 

3 Com. Cas. 164 Mr. Justice Bigham had to 

consider the term "subject to the same

clauses and conditions as original policy" 

and the well known warehouse to warehouse 

clause. All he said was that "it is such a 

common clause that the defendants ought to 

have known that it was in the original 

policy" (at p. 167). He found the clause to be 

"customary" and "to be read into the policy". 

I do not, however, consider that that is the 

test. Mr. Justice Bigham did not even cite 

the words of incorporation. In Charlesworth 

v. Faber, (1900) 5 Com. Cas. 508 the facts 

were similar and the clause in question was

found to be "in common use", and to be a 

clause of whose probable existence in the 

original policy the reinsurer knew or ought 

to have known (p. 412). The effect of the 

incorporation, however, was to extend the 

12 month term of the reinsurance to beyond 

12 months because the term was a 

"continuation clause" which provided for the 

insured to be held covered if the ship was at 

sea at the expiration of the policy. Whether 

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that should be regarded as an inconsistency 

or as a qualification or extension of the 

policy period does not for present purposes 

matter. Subject to that comment, I agree 

with what Mr. Justice David Steel said about 

those cases. They do not assist the question

at issue.

 208. I turn therefore to Interfoto v. Stiletto. 

There the defendant was held not to be 

bound by a term in a set of printed 

conditions which had been provided to him 

in the form of a delivery note, but which he 

had neither signed nor read. The question 

was not so much concerned with an 

incorporation clause as with whether the 

term in question had been sufficiently

brought to the defendant's notice so as to be 

incorporated into the contract. The term was 

described as "very onerous" (at p. 438F), 

and "unreasonable and extortionate" (at p.

445H). The Court of Appeal was even 

concerned that it might have been an 

unenforceable penalty (at pp. 436C, 445H446A), but that point was not argued. Lord 

*199 Justice Bingham, in a passage cited 

and applied by the Judge, put the test as 

follows (at p. 445B-C): 

 The tendency of the English authorities 

has, I think, been to look at the nature of the 

transaction in question and the character of 

the parties to it; to consider what notice the 

party alleged to be bound was given of the 

particular condition said to bind him; and to 

resolve whether in all the circumstances it is 

fair to hold him bound by the condition in

question. This may yield a result not very 

different from the civil law principle of good 

faith, at any rate so far as the formation of

the contract is concerned.

209. For all that neither party in terms

rejected what I might call the Interfototest, I

am nevertheless doubtful of the application 

of this principle as a means of solving the 

present problem, especially at this stage of

the proceedings. In the first place, Interfoto

v. Stilettowas not concerned with the 

effectiveness of an incorporation clause in a 

signed contract, which is essentially a

question of construction, but rather with a 

question of notice: the question of whether 

sufficient notice has been given to a person 

by means of a document which has notbeen

signed so as to render that person 

contractually bound by the term or terms set 

out in that document. Secondly, that 

question of notice is closely akin to a

question of awareness: the party affected by 

sufficient notice even if not actually aware 

of the term in question, is regarded as 

having constructive knowledge of it, i.e. as 

being constructively aware of it. Thirdly, the 

question of awareness is for present 

purposes out of bounds: see issue 3 of the

preliminary issues. The Court is merely 

asked to say what the consequences are, 

depending on whether the reinsurers were 

aware or were not aware that cl. 8 was part 

of the underlying insurance contract. In the 

circumstances it seems to me no more 

appropriate to go into the question of

constructive notice than actual notice.

Fourthly and a fortiori, it seems to me

inappropriate for the purposes of these 

preliminary issues to test the matter by 

asking whether there was sufficient notice to

hold that it would be fairto hold the 

reinsurers to the term in question. This is 

because it is clear from Lord Justice 

Bingham's analysis that this question is very 

closely akin to a question of good faith. In 

the insurance context, where even the 

common law has adopted the civil law 

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requirement of good faith, the question of

fairness posed by Lord Justice Bingham 

cannot be divorced from the insurance 

doctrine of uberrima fides and the question 

of what constitutes a fair presentation. Mr. 

Justice David Steel recognized the difficulty 

of divorcing the question which he posed 

and the separate question, not within the 

preliminary issues, of whether there had

been a fair presentation of the risk. I do not

see how the one question can or should be 

answered without bearing in mind and 

attempting to answer the other question at 

the same time. That could be a recipe for a 

new unfairness all of its own. Fifthly, this is 

particularly the case when it is borne in

mind that the test posed by Lord Justice 

Bingham and the Judge is a test which has to 

be answered "in all the circumstances".

However, the limitation of this trial of

preliminary issues make it impossible to 

take into account all the circumstances.

210. Sixthly, there is a further reason why, 

if the Interfoto analysis is appropriate at all,

it is necessary to take it together with the 

question of fair presentation. The remedy for

the case of notice which is insufficient 

because of unfairness is that the term in 

question never becomes part of the contract. 

However, the remedy for a case of unfair 

presentation of an insurance proposal is 

avoidance of the contract. The latter remedy 

goes much further than the former. It is only 

right that these issues be looked at together. 

Otherwise there is the danger that a notice 

which is judged to be fair, outside the 

broader question of whether there has been a 

fair presentation, undermines that broader 

question. Equally, however, if there be any 

unfairness at all, there is the danger that the 

Court is unable to consider whether in all the 

circumstances the right approach is to regard 

the offending term as never having been 

incorporated, thus saving the contract, or to 

regard it as incorporated, thereby potentially

destroying the contract.

211. Seventhly, I am not persuaded that the 

Interfoto test applies to a term that is merely 

unusual, at any rate in the context of a 

binding incorporation clause. I acknowledge

that some of the dicta in previous cases

referred to in Interfoto v. Stiletto mention 

the case of a term that is "usual": but 

Interfoto v. Stiletto itself was concerned 

with a term which was not merely unusual, 

but very onerous, unreasonable and 

extortionate. No one has suggested that 

those descriptions apply to cl. 8, however 

much it might increase the risk undertaken 

by an insurer. The experts were not asked to 

opine on such a question: their reports make 

it clear that they were asked whether cl. 8

was an unusual clause. Lord Justice Dillon

spoke of a term which is "particularly 

onerous or unusual" (at p. 439A); and both 

he and Lord Justice Bingham went out of

their way to stress the particular objections

to the offending clause in that case.

212. Eighthly, I am uneasy on a separate 

question about which there has not been 

much, if any, discussion in this Court, and 

that is whether the incorporation of cl. 8 

should be regarded as a matter dependent on 

the original terms of the underlying

insurance or on those terms as amended 

(HIH would say as superseded) by the 

policy wording. If it is regarded as the 

former, then the question seems *200 to 

depend on the question whether cl. 8 is 

incorporated by general words of 

incorporation. If, however, it is regarded as 

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[2001] 2 Lloyd's Rep. 161 Page 66

2001 WL 513044 (CA (Civ Div)), [2001] C.L.C. 1480, [2001] Lloyd's Rep. I.R. 596, [2001] 2 

Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

the latter, then its incorporation would seem 

to depend rather on the question whether the 

reinsurers have severally been consulted and 

have agreed on the amendment to the terms 

of the original policy.

213. I therefore conclude that the Interfoto

test, if applicable at all, a matter which I 

would prefer to leave open, should not be 

considered separately from the question of a

fair presentation, which lies outside the 

scope of these issues.

214. In the circumstances I do not think 

that it is possible or appropriate to say more 

than this. The term of the reinsurance slip

policy that the reinsurance is subject to all 

the terms as original, etc., together with the

invitation to consult the information held on 

the brokers' file, collectively place on the 

reinsurers the burden of showing that cl. 8 

was not incorporated, or that the proposal 

was unfairly presented. If a reinsurer was

actually or (subject to any appropriate test of 

fair notice) constructively aware of cl. 8, 

then plainly it could not be said that it had 

not had sufficient notice of it. If, however, 

cl. 8 could only become part of the 

reinsurance contract if the reinsurer had

actually agreed it, then it would be necessary 

to show that the clause had been actually 

agreed and not merely that sufficient notice 

of it had been given. Of course, these two 

questions may overlap. But all such 

questions of actual or constructive notice or 

awareness, or of actual agreement, are not 

for these preliminary issues. When they are 

debated, it will be on the basis that cl. 8 is

neither unconscionable nor extortionate on 

the one hand, nor standard or customary on 

the other hand, nor usual, but rather, albeit 

by no means unknown but something that 

the market would recognize.

(xii) For these purposes, does it make any 

difference whether a reinsurer was aware of

cl. 8?

215. I have already answered this question 

as best I can in the course of dealing with 

question (xi) above.

(xiii) If cl. 8 is incorporated into any 

reinsurance contract, what is its effect 

there?

216. I have already held, under question 

(x) above, that cl. 8 is not to be incorporated

into the reinsurance contracts in manipulated 

form, as a clause operating between 

reinsurer and reinsured independently of the

original insurance, but can properly be 

regarded as incorporated in its 

unmanipulated form.

217. What is its effect in this form? The

reinsurers submitted that it merely operates

as a type of follow the settlements clause,

binding the reinsurers to accept HIH's 

liability to pay even in circumstances where 

HIH might otherwise have had a 

straightforward defence based on nondisclosure or misrepresentation. Thus at 

least one effect of the clause would be to 

exclude any argument on the part of the 

reinsurers that payment by HIH in the face 

of non-disclosure or misrepresentation 

would have been in breach of its obligation 

to act in a businesslike manner: see

Insurance Co. of Africa v. Scor (UK) 

Reinsurance Co. Ltd., [1985] 1 Lloyd's Rep. 

312 at p. 330, a passage cited by Lord 

Mustill in Hill v. Mercantile and General 

Reinsurance Co. Plc. , [1996] L.R.L.R. 341 

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 104 of 115
[2001] 2 Lloyd's Rep. 161 Page 67

2001 WL 513044 (CA (Civ Div)), [2001] C.L.C. 1480, [2001] Lloyd's Rep. I.R. 596, [2001] 2 

Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

at p. 347; [1996] 1 W.L.R. 1239 at p. 1247. 

The reinsurers went far to accept that in this

form and as so regarded there was nothing 

very wrong with the clause's incorporation.

218. The question then arose: but what if

the only complaints of non-disclosure or 

misrepresentation at the reinsurance level, as

between reinsurer and reinsured, were

identical to the position relating to possible

complaints of non-disclosure or 

misrepresentation at the underlying level, as 

between the original assured and HIH? 

What, in other words, if the presentation of 

insurance and reinsurance was identical? 

When pressed with that question, it seemed 

to me that Mr. Gross and Mr. Ruttle were 

able to give no satisfactory explanation as to 

why, in those circumstances, the promise to 

recognize HIH's liability and thus to follow 

its settlement did not in turn entail that that 

promise remained effective even where the 

identical problem occurred at the 

reinsurance level. Otherwise, as it seems to 

me, the effect of the clause in its 

unmanipulated form would be meaningless. 

Where an original risk has been placed with 

original insurers on the basis of a certain 

presentation, it is highly likely that it will be

placed with reinsurers on the same basis. I 

intend to make no finding of fact 

whatsoever, but it appears that in the instant 

case the presentations were at any rate 

intended to be the same, and were conducted 

essentially by the same brokers on the 

instructions of, no doubt among others, 

Flashpoint. Indeed, the reinsurance was 

signed up before the original insurance.

219. Of course, I accept that it is perfectly

feasible for the presentation at the

reinsurance level to suffer from vices from 

which the presentation at the original level 

remains free. Upon examination, all the 

scenarios suggested by Mr. Gross and Mr. 

Ruttle to illustrate the unfairness of cl. 8 

operating entirely independently at the 

reinsurance level turn out to be examples of 

non-disclosure or misrepresentation which 

are personal to the reinsured's presentation: 

see, for instance, my citation from 

Independent's skeleton argument at par. 160 

above. In my judgment, such examples do 

not gainsay the *201 conclusion that if the 

incorporation of an unmanipulated cl. 8 is to 

bind the reinsurers to pay even where HIH

might otherwise have had a defence, then 

the reinsurers remain bound even where a 

defence based on what amounts factually to 

the same presentation might otherwise have 

been invoked by the reinsurers themselves. 

It is in just such a situation that the

reinsurers would be entitled to be subrogated 

to HIH's rights under the collateral contracts. 

Indeed, although Mr. Justice David Steel 

approved incorporation of cl. 8 in its 

manipulated form, it appears from his 

reasoning at pars. 43-44 of his judgment that 

he must have been thinking that cl. 8 would 

operate in a back to back manner at the two 

levels. It will do so, if the effect of the 

incorporation of cl. 8 in unmanipulated form

is as I have suggested it to be. It will not do 

so if the effect of cl. 8's incorporation is that 

for the self-same non-disclosure or 

misrepresentation at the two levels, HIH is

bound to pay but the reinsurers are entitled 

to avoid.

220. It seems to me that the effect that I 

would give to cl. 8's incorporation in the 

reinsurance contracts is also indicated and 

supported by the wording of the 

incorporation clause in the reinsurance slip

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 105 of 115
[2001] 2 Lloyd's Rep. 161 Page 68

2001 WL 513044 (CA (Civ Div)), [2001] C.L.C. 1480, [2001] Lloyd's Rep. I.R. 596, [2001] 2 

Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

policies, which emphasizes that the 

reinsurance is to "follow that placement in 

all respects".

 221. For these reasons I conclude that the 

effect of cl. 8's incorporation into the 

reinsurance contracts is to bind the 

reinsurers to pay, despite any non-disclosure 

or misrepresentation covered by the clause, 

in circumstances where the non-disclosure 

or misrepresentation in question is the same

at each level of the placement. Otherwise a 

defence intended to be waived back to back 

at both levels could be relied upon at the 

reinsurance level in circumstances where the 

primary remedy was intended to lie under 

the collateral contract.

Conclusion

 222. In conclusion, I would seek to 

summarize my answers to the preliminary 

issues stated as follows.

 223. Q1. Are the terms (of both the

insurance contracts and the reinsurance 

contracts) alleged by the reinsurers to have 

been warranties in fact such?

A1. Yes. The six film (or 10 film) slate 

terms were terms of both insurance and

reinsurance, and were warranties. The term

in the reinsurance that all amendments etc. 

had to be agreed by reinsurers was also a 

warranty.

 224. Q2. What is the effect of cl. 8 of the 

underlying insurance contract? In particular 

does it mean that the facts and matters 

alleged in the defences (if true) would not 

have provided the claimant 

insured/reinsured with a defence (whether in

a whole or part) to the underlying insured's 

claim?

A2. The effect of cl. 8 in the underlying 

insurance contract is to deprive the insured

of a defence on the ground of non-disclosure 

or misrepresentation, whether wholly 

innocent or negligent, and whether 

otherwise giving rise only to rights of 

avoidance or also sounding in damages. It 

also deprived the insured of defences and 

rights of set-off and/or counterclaim. 

However, it did not cover fraud. Nor did it 

cover breaches of warranty or defences 

based on lack of cover.

 225. Q3. On the assumption that the 

reinsurers' underwriters were aware that the 

underlying policy wording contained cl. 8, 

was cl. 8 a term of the reinsurance contract? 

Is the answer different if the underwriters

were not so aware?

A3. Subject only to arguments that (a) it 

would be unfair to incorporate cl. 8 into the 

Axa and Independent reinsurance contracts 

because of insufficient notice being given of 

an unusual term, and (b) that cl. 8 was not 

agreed at the reinsurance level in accordance

with the requirements of the amendments 

term referred to at A1 above, cl. 8 was 

incorporated into those contracts (in its 

unmanipulated form) whether those parties 

were aware of it or not. If, however, either 

party was in fact aware of cl. 8, then 

argument (a) is not available to it. Argument 

(a) cannot be divorced from the separate

argument, not within these preliminary 

issues, that the presence of cl. 8 in the policy

wording was not properly disclosed and 

rendered the relevant presentation unfair. 

For these purposes it is found that cl. 8 was 

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Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 106 of 115
[2001] 2 Lloyd's Rep. 161 Page 69

2001 WL 513044 (CA (Civ Div)), [2001] C.L.C. 1480, [2001] Lloyd's Rep. I.R. 596, [2001] 2 

Lloyd's Rep. 161, [2001] 2 All E.R. (Comm) 39, [2001] EWCA Civ 735 

(Cite as: [2001] 2 Lloyd's Rep. 161)

an unusual term, but for the full finding see 

pars. 205 and 214 above. New Hampshire 

has conceded that cl. 8 was incorporated into

its reinsurance contract. In the light of the

discussion in this judgment under questions 

(x) and (xiii) above, the Court may require 

further assistance from New Hampshire 

and/or HIH as to the precise nature of the 

incorporation conceded.

 226. Q4. What is the effect of cl. 8 in the 

context of the reinsurance contracts? In

particular does it mean that:

 (i) the facts and matters alleged in the 

defences and counterclaims (if true) do not

provide the defendant reinsurers with a 

(complete or partial) defence (including by 

way of set-off) to the claimant 

insurer's/reinsured's claim; and/or 

(ii) the defendant reinsurers do not (or did 

not) have the right to avoid the reinsurance 

contract on the grounds of

misrepresentation or non-disclosure 

(assuming that they otherwise *202 have or

had such a right) irrespective of whether or 

not the relevant misrepresentation or nondisclosure was negligent or fraudulent as 

opposed to innocent?

A4. The general effect of cl. 8 in the 

reinsurance contracts of Axa and 

Independent is that stated under question 

(xiii) above, so far as matters of nondisclosure or misrepresentation are 

concerned. The scope of cl. 8 is as stated in 

A2 above. There has been no attempt in 

advance of judgment to take the Court 

through the matters alleged in the defences 

and counterclaims to determine which if any 

of them would, even if true, nevertheless fail 

to provide those reinsurers with a defence. 

This is understandable given the possible 

permutations of the Court's answers as to the 

incorporation, scope and effect of cl. 8. As

to New Hampshire, I would repeat what I 

have said at the end of A3 above.

227. To a large extent therefore the 

answers provided by the Judge below have 

survived attack from both sides. Only on 

questions (ix), (x) (in part), and (xiii) have I 

differed from him. On questions (xi) and 

(xii) I have preferred to leave over the issues

of fairness and sufficient notice and also the 

issue of the relevance of awareness to trial.

It follows that, subject to those exceptions, 

both HIH's appeal (in whole) and the 

reinsurers' cross-appeal (in large part) have 

failed. The only, limited, successes have

been on the cross-appeal, where Axa and 

Independent have displaced both specific 

incorporation of cl. 8 and the incorporation 

of a manipulated cl. 8; but they have failed 

to knock out its incorporation altogether.

 Lord Justice MUMMERY:

 228. I agree.

 Lord Justice PETER GIBSON:

 229. I also agree.

(c) Lloyds of London Press Limited 

END OF DOCUMENT

Copr. © West 2004 No Claim to Orig. Govt. Works 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 107 of 115
Exhibit C 

C. Affidavit of Conrad Kattner 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 108 of 115
IN THE UNITED STATES DISTRICT COURT 

FOR THE EASTERN DISTRICT OF PENNSYLVANIA 

LEXINGTON INSURANCE COMPANY CIVIL ACTION 

Plaintiff

v. NO. 02-4435 

DAVID FORREST, 

T BEAUCLERC ROGERS IV, 

STANLEY MUNSON, 

MARTY FINK, 

NEW BEGINNINGS ENTERPRISES LLC, 

and TARLO LYONS 

Defendants

AFFIDAVIT OF CONRAD KATTNER 

IN SUPPORT OF 

MOTION OF DEFENDANT STANLEY MUNSON 

FOR JUDGMENT ON THE PLEADINGS 

PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(C)

COMMONWEALTH OF PENNSYLVANIA ) 

COUNTY OF PHILADELPHIA ) ss: 

CONRAD O. KATTNER, being duly sworn, deposes and says: 

1. I am admitted to practice before this Court and a member of the firm of McShea 

& Tecce, P.C., Bell Atlantic Tower, 28th Floor, 1717 Arch Street, Philadelphia, PA 19103. I 

make this affidavit in support of the Motion of Defendant Stanley Munson for Judgment on the 

Pleadings Pursuant to Federal Rule of Civil Procedure 12(c). 

2. Annexed hereto as Exhibits D and E to that Motion are what I believe to be copies 

of the Flashpoint Ltd. (Jersey) and the Flashpoint (UK) Collateral Agreements with regard to a 

four film transaction called “Filmworks,” identified in these documents as part of Hollywood 

Funding No. 5. 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 109 of 115
3. The version of the documents annexed hereto was served by plaintiff Lexington 

Insurance Co. with its First Requests for Admissions, of which Nos. 14 and 15 sought 

admissions of their authenticity from Stanley Munson. The requested admissions were made. 

Conrad O. Kattner 

Sworn before me this 

________ day of January, 2005 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 110 of 115
Exhibit D 

D. Collateral Agreement re: Filmworks between Lexington and Flashpoint (Jersey) 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 111 of 115
Exhibit E 

E. Collateral Agreement re: Filmworks between Lexington and Flashpoint (UK) 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 112 of 115
IN THE UNITED STATES DISTRICT COURT 

FOR THE EASTERN DISTRICT OF PENNSYLVANIA 

LEXINGTON INSURANCE COMPANY CIVIL ACTION 

Plaintiff

v. NO. 02-4435 

DAVID FORREST, 

T BEAUCLERC ROGERS IV, 

STANLEY MUNSON, 

MARTY FINK, 

NEW BEGINNINGS ENTERPRISES LLC, 

and TARLO LYONS 

Defendants

CERTIFICATE OF SERVICE 

Conrad Kattner, Esquire, attorney for Defendant, Stanley Munson, hereby certify that I 

have caused copies of the foregoing: 

(1) Motion of Defendant Stanley Munson for Judgment on the Pleadings Pursuant to 

Federal Rule of Civil Procedure 12(c); 

(2) Memorandum of Law in Support of the Motion of Defendant Defendant Stanley 

Musnon for Judgment on the Pleadings Pursuant to Federal Rule of Civil Procedure 

12(c); 

(3) Affidavit of Conrad Kattner in Support of Motion of Defendant Stanley Munson for 

Judgment on the Pleadings Pursuant to Federal Rule of Civil Procedure 12(c); and 

(4) (Proposed) Order 

to be served electronically, and by any additional means shown, upon the following parties or 

their counsel of record on the date below: 

 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 113 of 115
Via Hand Delivery Jan. 28, 2005

Glenn F. Rosenblum, Esquire 

Jeffrey R. Lennan, Esquire 

Montgomery, McCraken, Walker & 

Rhoads 

123 South Broad Street 

Philadelphia, PA 19 109 

Via Overnight Delivery Sent Jan. 28, 

2005

Edward P. Krugman, Esquire 

Emily A. Poler, Esquire 

Ira J. Dembrow, Esquire

Scott M. Mory, Esquire 

Cahill Gordon & Reindel 

80 Pine Street 

New York, NY 10005 

Counsel for Plaintiff 

Alexander Kerr, Esquire 

Stephen P. McFate 

McCarter & English, LLP 

Mellon Bank Center 

1735 Market Street, Suite 700 

Philadelphia, PA 19 103 

and 

Beverly Y. Lu, Esquire 

Charles A. Adamek 

Lord Bissell & Brook, LLP 

300 South Grand Avenue, Suite 800 

Los Angeles, CA 9007 1 

Counsel for New Beginnings Enterprises 

Edward M. Dunham, Jr., Esquire 

Shannon Hampton Sutherland, Esquire 

Duane Morris LLP 

One Liberty Place 

Philadelphia, PA 19 103 

Counsel for David Forrest 

John D. Gordan, IIII 

Eugene F. Bannigan 

John N. Thomas 

10 1 Park Avenue 

New York, NY 10 178 

Thomas M. Kittredge 

Kenneth L. Racowski 

170 1 Market Street 

Philadelphia, PA 19 103 

Counsel for Tarlo Lyons 

Nicholas M. Centrella, Esquire 

James J. Rohn, Esquire 

Kevin Dooley Kent, Esquire 

Conrad OYBrien Gellman & Rohn, PC 

1 5 1 5 Market Street, 1 6th Floor 

Philadelphia, PA 19 102 

Counsel for T. Beauclerc Rogers, IV

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 114 of 115
Neil G. Epstein, Esquire 

Eckert Seamans Cherin & Mellott, LLC 

15 15 Market Street 

Ninth Floor 

Philadelphia, PA 19 102 

and 

Jeffrey D. Farrow, Esquire 

Mona Z. Hanna, Esquire 

Sanford Louis Michelman, Esquire 

Michelman & Robinson LLP 

4 Hutton Centre, Suite 300 

Santa h a , CA 92707 

Counsel for Martin Fink 

Respectfully submitted, 

BY: /s/ Conrad O. Kattner__________

CONRAD O. KATTNER, ESQ. 

Identification No: 035468 

MCSHEA & TECCE, P.C. 

1735 Market Street, 16th Floor 

Philadelphia, PA 19103 

 (215) 599-0800 

Attorney for Defendant, 

 Stanley Munson 

Date: ____January 27, 2005___________ 

Case 2:02-cv-04435-AB Document 128 Filed 01/27/2005 Page 115 of 115